Wednesday, January 5, 2011
The graph above shows a measure of global liquid fuel production (the average of EIA, IEA and OPEC estimates) against the real spot price of oil. It shows a pattern that I first commented on in Nov 2009, that around about 2004/2005, we entered a shift in the price/production relationship. Prior to that, it only required modest price increases to trigger production increases. In the post 2004 interval, large price increases are required to produce more oil, as indicated by the shallow slope of the data in the pink oval above. I christened this the "era of inelastic oil" (in search of a less loaded term than "peak oil", as well as one that is less empirically disputable).
Interestingly, the last couple of data points are raising their heads above the parapet: more production has been achieved at less price than in 2008. I would suspect the reason is that the end stages of the 2005-2008 oil shock involved a certain amount of speculative overshoot, and that dragged the pink oval into an even flatter aspect than it would otherwise have had. That speculative fervor is (so far) absent this time, so prices have not been pushed as high, and presumably more reflect the underlying fundamentals of supply and demand.
It will be interesting to see in what direction the data move in coming months.