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Oil price predicted to exceed $100 per barrel

Regular readers of this blog will be aware that I am concerned about the lack of response from government to matters relating to the depletion of crude oil.

There are a number of websites and organisations which deal with matters relating to whether or not we should be concerned.

www.hubbertpeak.com is one of the useful websites. This is named after the US Geologist who correctly predicted (in 1956) that US production of Crude Oil would peak in 1971 (which it did).

The Association for the Study of Peak Oil (ASPO) is a useful source of information and they issue a regular newsletter via email (it is actually on a website, but they issue an email to tell you to download it).

In essence the argument is quite straightforward. Oil is something produced many thousands of years ago and stored underground. There is a finite amount of oil. Not all Oil in any particular aggregation can be extracted and gradually as more of the potential oil is extracted then it becomes harder. There gets to be a point at which the energy expended in extracting the oil is more than is obtained from the oil and, therefore, oil extraction logically ceases.

On an aggregate global basis one would expect oil fields to be depleted at different times. Overall, however, there will come a point at which oil production is at a maximum after that point it will reduce.

The argument is what is the year in which maximum production occurs. The real difficulty is there is no real way of being certain about that year until about 3-4 years afterwards. Much of the published information about crude oil reserves is unreliable particularly in the Middle East.

Hence there will come a year of "Peak Oil" production. There is an argument that for conventional crude Oil that may have been 2004. Notwithstanding that alternatively it could be any year in this decade.

After that point oil becomes scarce so the price goes up. In fact we then move from a situation in which oil is priced as a readily available commodity to one where it is priced on the basis of scarcity.

In a sense a good symptom to predict whether or not we have got close to peak oil is if the price starts spiking.

The cause of a spike can be for instance the closure of a refinery in Venezuela or the bombing of a pipeline in Iraq. However, the main reason for the spike being possible is an absence of spare capacity in the system.

The global production of oil runs around 70 Million Barrels of oil per day. The UK produces and consumes about 2.5 Million Barrels.

A bbl (Blue Barrel) is 42 US Gallons. The UK tends to quote oil quantities in Millions of Tonnes instead.

The ready availability of cheap oil does not just affect air flight (where there is no taxation on fuel) it also drives almost all other economic activity.

An important issue is the energy intensity of the Gross Domestic Product. In essence this calculation of joules per Pound implies that unless things get more energy efficient as we get reductions in energy availability (and hence use) we end up with recession.

The other important issue for the UK is that we are likely to cease being an energy net exporter in about 2007.

The first step for dealing with oil depletion is what is called the "Depletion Protocol" which is aimed to get countries to control their consumption. My own feeling is that market forces are more likely to control consumption initially. After a while a Depletion Protocol may be accepted, but I expect people to try to circumvent it.

Notwithstanding that it is worth reading the websites cited above.

My own view is that this particular issue will be a key underlying driver for political change over the coming decades.

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