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.