This is a guest post by Robert Smithson, a portfolio manager at a London based investment fund.

This is part one of a two part article on the economics of oil price demand. The second part looks at the economics of peak oil, and how the oil fits into an overall energy demand curve.

Introduction

“The world is consuming more oil than it is producing.” --The Economist, July 14-20 print edition.

Wow, that’s a shockingly foolish statement. Each day approximately 84 million barrels of oil are extracted from the earth, and approximately the same amount is consumed. It can be no other way: inventory space is limited, and could not be extended significantly by “excess production” or indeed drawn down for long by “excess demand”.

The problem is a basic lack of understanding of economics. And The Economist is hardly the only culprit.

This is a guest post by user Davidyson, who is living in Potsdam, Germany, peak oil aware since May 2004, computer scientist, journalist, consultant, project manager and web specialist, currently freelance consultant, closely acquainted with several senior people in the Potsdam Institute for Climate Impact Research.

When oil prices reached last year’s maximum without causing more than a slight slowdown of economic growth, many pundits claimed publicly that the absence of severe consequences were due to a growing independence of GDP creation from oil in our more efficient and more service-oriented economies.

The following analysis tries to reason to what extent this is really true, and at what point serious consequences will set in.

OK, that's enough. After reading this happy CERA drivel (hat tip, Leanan)

CERA estimated that oil production capacity -- including crude oil, condensate, natural gas liquids, oil sands, gas-to-liquids - could rise to 108 million barrels per day in 2015, up from 87 million barrels per day currently.

it seemed apparent that fantasy was the order of the day. So, given the legacy of the 20th century (the Armenian genocide, World War I, the 1929 stock crash, the Great Depression, Mao Tse Tung's "Great Cultural Revolution", Stalin's purges, Romania's Ceausescu, World War II & the Holocaust, the Korean War, the Cold War, the Vietnam War, Russia's war in Afghanistan, Imelda Marcos' shoes collection, the Rwandan genocide, the Balkans fiasco and Bosnian genocide, etc.) and a conviction that humankind has gotten no wiser in the 21st century, a more pessimistic fantasy regarding oil depletion and supply shocks seemed to be called for. So, here we go.