Monday, 8 September 2008

Oil prices: it's not about the geology

This article by Nils Pratley was in this weekend's Observer. It mainly concentrates on the influence of OPEC, the cartel that controls around 40% of the worlds oil supply. It re-iterates that oil prices generally don't have too much to do with how much oil there is available to produce: it's more about how much actually gets produced, for reasons that tend to be economic and geopolitical as much as geological.

The oil price is back down to $107.30 today, from a high of $147 in early July. That's a 20% fall in just two months. This has little do with the state of oil production, and everything to do with speculation. Now the OPEC countries have got used to oil at $100+ a barrel, they're ready to take action, by cutting production, to keep oil prices high. And, of course, the west needs relatively high prices to drive investment in technically and/or politically difficult fields, now that most of the easy oil has been found.

It's a strange situation. If there was a cartel that was fixing prices in, say, the British airline industry, something would be done about it. But oil is not like other commodities.

One thing in the article that bothered me a little was this:

The Saudis guard closely their data on the oil reserves and production capability. Why? "Peak oil" theorists argue it's because the big reserves aren't as big as advertised.

This makes 'peak oil' sound like a conspiracy theory. In fact, the peak oil hypothesis says nothing about the size of Saudi Arabian reserves. What it says is that global oil production will follow a similar pattern to sub-sets of global production (such as production from single basin, or a single country): that is, it will increase until roughly 50% of the oil has been produced, and then it will fall. Some people, who you might call early peak oil theorists, think that OPEC reserves are overstated, but that doesn't alter the fact that oil production will peak: it just shifts the timing of the peak.

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