Title: The Breaking Point
Author: Peter Maass
Published: August 21, 2005

Overview: This brief article points to statistics that suggest global consumption of oil, driven by Chinese and U.S. demand, is growing at an unsustainable rate as the amount of oil in the world reaches its midpoint. Peter Maas makes the case that higher oil prices are purely the result of supply and demand. In addition, should demand exceed supply prices will spike up even higher.

Details: The author traces the nearly invisible commodity of oil back to Saudi Arabia, the country that China and the U.S. believe will fill the gap when it comes to increasing oil demands.

Some of the analysts he interviews suggest that the dramatic increase in price of crude oil is not related to any boycotts, wars, or strikes but simply to demand catching up with supply. For example, from the mid-1980s until 2004, the inflation adjusted monthly average of oil floated between 20 and 30 US dollars a barrel. Currently, the price per barrel hovers around $60 US.

(It should be noted that this article was written the week before Katrina hit the Gulf Coast and that the spike in gasoline prices last fall were related to shortages in refining capacity, not shortages in supplies of crude oil.)

The analysts explain this increase in the price of crude oil by pointing to the growing demand from the United States and several large developing countries. The global demand for oil is increasing at a rate of 2-3 million barrels per day each year (84.5 million barrels per day in 2004), and in order to cover declines, that rate increases to 6 million. That is the equivalent of creating another Saudi Arabia every few years.

In addition to growing demand, the amount of oil in the world is fast approaching its midpoint and as it does, our ability to extract it becomes immensely difficult. Errors in extraction processes can damage the potential outputs of entire fields.

To complicate matters, Saudi Arabia will not specify what its production capacity is, though many insiders say it is around 15 million barrels per day. The U.S. Department of Energy estimates that by 2020 Saudi Arabia will need to pump 18.2 million barrels a day to quench demand. Currently Saudi Arabia produces 10.5 million barrels per day (10% of the world’s supply).

Though producers are earning unprecedented profits, they realize that if the price of oil climbs too high demand will drop off and alternative energy sources will take away market share. Apart from demand topping supply, there is the additional worry that a small interruption in supply (i.e. natural disaster, terrorist attack) can cause shortages and price spikes. Ordinarily, an interruption in one facility’s supply could be countered by increasing supply at another. But when the world is approaching its limit in production, any disturbance will have profound consequences.

Three Points of Personal Interest:

1. In the 1970s President Carter pushed hard to lower US oil consumption. He was not re-elected.

2. Both presidential Candidates in 2004 almost totally ignored the subject of energy policy. The Bush Administration accused Kerry of having a “wacky” idea: a gasoline tax.

3. Oil producing nations are taking criticism from consumers regarding the price of oil. But the producers are blaming consumers for an insatiable demand.