There’s a great interview with Chris Nelder on why oil triumphalism is mistaken, and what that means for a whole host of things, including oil prices:
P: Now what about prices? We’ve seen oil prices soar from around $40 per barrel in 2004 to $140 per barrel in 2008. And nowadays, prices in the $100 range are pretty much normal.
CN: One of the implications of peak oil is that as production starts to falter, we need much higher prices in order to sustain production. And that’s exactly what’s happened since 2005.
Another implication is that the economy would be unable to tolerate those high prices and would contract. That also seems to have happened. U.S. employment is still below 2008 levels. Europe is struggling. Now, it’s difficult to sort out the effects of high oil prices on the global economy because we also had the financial crisis and everything else. But guys like James Hamilton have done some interesting research showing that when oil expenditures reach a certain percentage of GDP, that induces a recession. So there is some evidence.
BP: It seems like one of the implications of peak oil is that prices will bounce around a narrow window. They can’t go too low, because then all those tight oil wells in North Dakota will be unprofitable. But they can’t go too high, because that will crush the global economy.
CN: A number of analysts have argued that the floor on oil prices is now around $85 per barrel. It might vary from place to place. An existing well in the Bakken might be profitable when oil’s at $70 or $75. For Arctic drilling, prices might have to rise to $110 per barrel. But the floor is around $85.
But there’s also a price ceiling for what consumers are able to pay. I think that’s probably around $105 for West Texas Intermediate and $125 for Brent. This is why world prices have been bouncing around this narrow ledge between floor and ceiling since 2007. We have to keep prices in that range, not too high to kill demand, but not too low to kill supply. Again, that’s very consistent with the concept of what peak oil has always been.
BP: The other interesting dynamic you’ve noted is that once oil production stagnates, we’re essentially in competition for oil with China and India.
CN: Right now, all of the new oil consumption in the world is coming from outside the OECD and the developed world. It’s largely coming from in China and India. And that new oil demand is now being met, almost exactly, by declining demand in North American and Europe:
Another consequence of hitting that plateau is that net global oil exports will continue to fall. Oil-exporting nations will make a lot of money thanks to higher prices, and they’ll grow as a result. But that means they’ll also start consuming more of their own oil. And this is exactly what’s happening worldwide — net global oil exports have declined since 2005. Countries like Saudi Arabia have seen enormous growth in oil consumption.
And what that means is that the United States will have to cut consumption in response. We are the most vulnerable oil importer: We consume about 18 million barrels per day and produce about 7 million. So as net global exports decline, our consumption will have to fall. And that’s already happened.
Nelder does a great job of covering the main salient points intelligently. Read the whole thing!