Supply and demand in the Middle East

In the continuing interest of figuring out what in God’s name is going on with the price increases in oil, I did a little research on the US Government’s Energy Information Administration website, which apparently exists. (I suppose it may be an inexorable fact that governments continue expanding until beaurocracies are created to represent all possible three letter combinations, at which point they move on to four letter ones like USSR.)


To put the world oil supply in historical perspective, I took the past data for proven reserves and divided it by the yearly world oil consumption. The result (shown above in red) is a plot of the number of years worth of reserves in the ground expressed in the years of consumption at that time. If you can trust the reserve data, this number is basically a lower bound on the amount of time before the oil hits the fan. For reference, I’ve also shown the total worldwide consumption.

There are two interesting things, I think, about this plot. First, it’s kind of hard to worry too much about “peak oil” when the amount of time our reserves will last keeps going up, not down. Second, there doesn’t appear to have been any change in the consumption or suppy (at least in terms of reserves) that would justify the sustained rise in prices that occured around 2001.

There is certainly more that goes into the supply curve of oil than just oil reserves, such as cost of production. (Speaking of which, if anybody knows where I can get my hands on cost of production data, I’d appreciate it.) Nonetheless, it’s just hard to imagine that the price of oil would rise a factor of four in as many years without noticeable changes in consumption or reserves.

Apparently, the Saudis agree, and in response to criticism of OPEC’s management of the oil market, have claimed that much of the high price of oil is due to speculation. Admitedly, it’s hard to see how speculation can have such an effect in a market where the underlying asset is denominated in 220 pound barrels of rotted dinosaur. However, there have been two a recent phenomena in that last decade or so that might explain things: (a) financial instruments are being invented by so-called investment banks to allow speculation on virtually anything and (b) hedge funds popping up like weeds to do just that. If true, it’s an important and fascinating era in finance and commodities, though perhaps not a welcome one.

13 responses to “Supply and demand in the Middle East”

  1. That’s all fine and well, but the chart doesn’t show the 55% increase called for by the IEA by 2030. It’s also been a great point of contention about how quickly Saudi Arabia in particular can get those reserves out of the ground. Saudi says it can extract crude at rates that western engineers say is either impossible or will result in disaster. Another case in point: Canada actually has greater proven reserves than Saudi, but because it’s embedded in sand is much slower and more costly to extract. Reserves have been increasing, but at much greater cost, and more and more of in inaccessible places or politically volatile places. Crude prices also include logistics costs.
    The thing about this chart is that when the “peak oil” hits, it likely will not taper slowly, but drop precipitously as simply no more oil will be found.

  2. Thanks for the comment. If you look at the graph, you’ll see we got a roughly 50% increase in consumption in the past 25 years. Another 50% by 2030 wouldn’t be much of a deviation from that growth.

    Your point is well taken about the increasing cost of extraction from the reserves, but until I see somebody show me data otherwise, I have to assume that the present price increases are far an above any increase in present extraction costs. If oil were profitable in the 20’s, then even doubling extraction costs doesn’t justify prices where they are now.

    This has all the signs of a mania and a bubble, and there’s not a lot of actual data or cold hard facts in all the media frenzy.

  3. A big reason for price spikes is declining production, not because the reserves aren’t there, but because of political considerations:

    The 3rd world nations that have the largest proven reserves are motivated to use oil for political reasons.

    They are not motivated to produce oil efficiently or effectively.

    It may be politically correct to kick out Western oil companies and turn to Iranian, Chinese, or national companies instead,

    But BP or ExxonMobil has the experience and technology to recover more oil, and get it out of the ground far more cheaply than any 3rd world company.

    Until the trend reverses, expect continued significant declines in crude oil production from nationalized oilfields.

    Too bad Venezuela’s more interested in looting its oil sector for votes than in developing its immense oil sands.

  4. Hi…I Googled for price of oil, but found your page about Supply and demand in the Middle East…and have to say thanks. nice read.

  5. Bill, thanks for writing. I understand that there have been production problems in Venezuela. In the past decade, their share of world oil production has declined. But it’s been more than made up for by Russian oil, which is finally starting to come online with their foray in to capitalism, and the Saudi’s spare capacity has always been there as a buffer (though they are getting close to their limits, admittedly).

    So, while I agree with everything you said, I don’t see how any of it justifies a quintupling of oil prices in less than a decade. Everybody wants to act as if this is all normal market operation, but it strikes me as overly guileless to see the curves above and assume fair pricing dynamics must be the explanation given that we’re talking about an industry run by a middle eastern cartel, with consumer sales brought to you by the same group of people that brought us Enron. I’m normally very supportive of conservative, free market principles, but this is enough to get even me suspicious.

  6. The methods used to generate the ¨proven reserve¨ numbers are highly dubious. You may recall in 2004 20% of Shell´s reserves kinda sort vanished into thin air. Saudi´s proven reserves magically increase without actual oil discoveries despite the fact they have pumped out about as much oil as the original reserve numbers. Furthermore, even if the Saudi´s did know how much they had in the ground, there is absolutely no incentive for them to share this information with other people.

    Secondly, the dollar´s purchasing power is not accurately measured by the CPI. A stack of rusty manhole covers has nearly tripled in value since 2000 in dollar terms. While oil companies have dramatically increased spending on exploration, very little increase in actual resources deployed has been seen thanks to the collapse of the dollar. The WSJ number I recall were a 70% increase in dollars for 5% increase in actual exploration.
    If you are buying steel, copper, energy, anything other than plasma screen tee vees, the dollar has literally lost 70% of its purchasing power since 2000.

    Check out Matt Simmon´s stuff. I believe production hit a high several years ago and not been exceeded to date.

  7. Oil will never go below $85 again. In 2010 oil will be over $250 a barrel and gas will be $10 a gallon. Even though reserves are rising which should make oil prices drop the fact they don’t drop in price is because the political tensions are rising. With that you will either buy a hybrid which will still be expensive to operate or ride your bike or take the public transit. There are ways to reduce your fuel cost.

  8. Thanks for the graph.
    Oil production and consumption info is hard to find.
    Market fundamentals have nothing to do with the price of oil.

    “…to every one’s surprise and indeed comfort, markets seem to have taken a U-turn and an abrupt one.
    Indeed market fundamentals changed the scenario — almost overnight — if one could dare say so, underlining once again the crude markets were not in control of the simple demand — supply dynamics.
    There are additional, extra-market forces, controlling the markets in a big, big way.”

    And this,
    “”Qatar’s oil minister has reiterated that the oil market is well
    supplied and there is no need for Opec to boost output at its February
    1 meeting.
    In the past week, US President George W Bush and his Energy Secretary
    Sam Bodman have both urged the producer group to pump more oil to ease
    the impact of record prices on the world’s largest economy….
    …..The Qatari minister blamed the high price of oil on speculation
    in futures markets rather than on any problem in supplies. US crude
    settled at $90.57 ($NZ119.69) a barrel on Friday, having fallen from a
    record of over $100 earlier this month.
    “You have to segregate the physical market from the paper market,” he said.”

  9. I think you will enjoy the perspective of the writers on our contrarian news and opinion website. Here’s an investor’s guide called Peak Oil Facts: How to Survive the Coming Crisis

    This no-nonsense guide is designed for investors who want to learn how to capitalize on the peak oil crisis, look for investment opportunities opened up by the decline of global oil capacity and protect their income and retirement funds against losses triggered by peak oil. Each article contained in this guide will give you helpful, unbiased information providing everything you need to know about peak oil and our predictions for the world’s oil production capacity. You will learn how to not only survive this coming crisis, but also how to profit from it.

  10. I believe that peak oil is accurate and that we are now past the point of peak oil. I understand many of the current events have to do with this senerio and it won’t be long before the main stream media and population wake up and understand what is going on. For me and my family, we are preparing for the next generation.

  11. I am commenting to make you know what a remarkable experience our child went through using yuor web blog. She came to understand too many details, with the inclusion of how it is like to have an excellent giving character to get most people without difficulty fully understand selected impossible subject areas. You actually did more than visitors’ expectations. Thanks for showing the priceless, healthy, revealing and as well as cool guidance on your topic to Evelyn.

  12. A motivating discussion is definitely worth comment. I think that you ought to publish more about this topic, it may not be a taboo matter but generally people don’t talk about such issues. To the next! Cheers!!

Leave a Reply

Your email address will not be published.