Karela Fry

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Peak oil: the tipping point

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Oil production ceiling and price phase change post 2005

James Murray and David King wrote in the 26 January 2012 issue of Nature:

There is less fossil-fuel production available to us than many people believe. From 2005 onwards, conventional crude-oil production has not risen to match increasing demand. We argue that the oil market has tipped into a new state, similar to a phase transition in physics: production is now ‘inelastic’, unable to respond to rising demand, and this is leading to wild price swings. Other fossil-fuel resources don’t seem capable of making up the difference.

Such major spikes in fuel price can cause economic crises, and contributed to the one the world is recovering from now.

Production has been roughly constant for the past seven years, despite an increase in price of around 15% per year (at Brent crude (London) prices) from about US$15 per barrel in 1998 to more than $140 per barrel in 2008 (see ‘Oil production hits a ceiling’). The price still reflects demand: it declined to about $35 per barrel in 2009 thanks to the 2008–09 recession, and recovered along with the upturn in the global economy to $120 per barrel before declining to its value today of $111. But the supply chain has been unable to keep pace with rising demand and prices.

A plot of prices against production from 1998 to today shows this dramatic transition, from a time when supply could respond elastically to rising prices caused by increased demand, to when it could not (see ‘Phase shift’). As a result, prices swing wildly in response to small changes in demand.

So alternative energies are instruments to invest in now.


Written by Arhopala Bazaloides

February 15, 2012 at 6:31 pm

2 Responses

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  1. […] it is forced to stop buying Iranian crude. Not only is Saudi crude going to be more expensive, with oil prices having turned inelastic, there is almost certainly going to be rise in the price of crude (contrary to the claim in the […]

  2. […] threat of US sanctions if dependence on Iranian oil is not reduced hangs over India. In the age of oil price inelasticity, this is a clear inflationary problem. This article from IE can be read as an indication that a […]

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