If US demand falls 25%, that would be the same as Ghawar disappearing off the face of the earth.

Oil and oil alternative supply, demand and price

Energy Intelligence group/ Bloomberg supply and demand graph

Beyond 2010, there seems like there will be a significant and growing supply of $35-65 oil and oil substitutes.

1. Petrobanks THAI/Capri and other oilsand and heavy oil processes could make over a trillion barrels of oil affordable at $20,000 per producing barrel.

2. Multi-stage horizontal fracturing can be used to access oil in the Bakken Formation and older wells. Old wells in the USA have 360 billion barrels left in them, which have not been affordable to access. Multi-stage horizontal fracturing lowers the costs by 2-3 times.

3. Coal gasification and liquification is coming on stream and could be million barrel per day additions and growing from 2016+.

4. Third and fourth generation biofuel processes appear also to be on track to significant scale and affordability.

Having no expert knowledge in this area, please excuse my simplistic question: is the following scenario relevant to the current supply and price of oil.

For whatever confluence of reasons in the past year, oil went over $100 (briefly almost $150). If anyone had any means to pump oil out of the ground, they would pull out all the stops and pump as much as possible – 24 x 7 using every possible resource. Of course, it takes time (a few months?) for the oil to get from a hole in the ground to some productive end use. During this transit time, the SHTF in the financial markets and demand from industrial and motor vehicle uses dropped below the amount of oil supply eagerly flowing into the end-use markets. Now, it is a buyers market with lots of surplus oil available. Once the price dropped significantly, a couple of things happened. First, the oil producers decrease pumping; explorers decrease exploring and drilling; alternate energy projects go on hold; etc. - all because there is little profit motive. Second, the smartest guys in the room (with a few extra bucks), start buying and stockpiling cheap oil.

Going forward, the price of oil will be dampened for awhile because demand from industrial activity and associated transportation uses of oil will be less than the regular flow of oil from producers plus the oil the smart guys can sell as soon as they see a profit potential. After some time (what? A year or two?), industrial inventories of essential goods and services (even if not robust) will necessitate increased oil demand. But now the pipeline will have a decreased flow of oil, smart guy oil will decrease, and little work will have been done on new projects for conventional and alternative energy. In addition, a year or two of relatively cheap oil will perpetuate the NASCAR mentality and the average person will have done little to increase efficiency or conservation of energy. At that point, a new confluence of factors will lead to another spike in prices because, most likely, none of the fundamentals of oil supply have really changed – probably no magical technology break through, no vast new oil field discovery, no reversal of decline rates, and no significant reduction in population growth. More likely to occur is some unforeseen geopolitical event, which constrains the supply of oil that is technically available. So, in a few years (certainly much less than 10) oil will be back up over $100 a barrel – that is unless our most feared scenarios of collapse occur first and the entire way we look at energy now is irrelevant.