The Oil Drum: Europe

This is a guest post by Robert Smithson, a portfolio manager at a London based investment fund.

This is part one of a two part article on the economics of oil price demand. The second part looks at the economics of peak oil, and how the oil fits into an overall energy demand curve.

Introduction

“The world is consuming more oil than it is producing.” --The Economist, July 14-20 print edition.

Wow, that’s a shockingly foolish statement. Each day approximately 84 million barrels of oil are extracted from the earth, and approximately the same amount is consumed. It can be no other way: inventory space is limited, and could not be extended significantly by “excess production” or indeed drawn down for long by “excess demand”.

The problem is a basic lack of understanding of economics. And The Economist is hardly the only culprit.

(This is a post with the old comment thread for the post above...sorry to make you click back and forth...the new link is here.)

Interesting times, indeed. Oil (NYMEX WTI front month future) closed at record intraday trading high of $78.77 per barrel on August 1st, but has since fallen back to near $70. The markets are clearly shaken, and suddenly people are realizing that the recent explosion of derivatives has created as much hidden rigidity as resiliency in our financial markets (as I wrote about here). Is this the beginning of economic collapse, or just another minor perturbation?

Dr Marc Faber is a Swiss financier who predicted the Wall Street Crash in 1987. He is well know as the editor and publisher of the Gloom, Boom & Doom Report. Although not exactly an optimist Dr Faber is a widely respected financial analyst.

This video contains very interesting clues on how to prepare financially for Peak Oil.

On this third installment of the Contrarian Arguments series we’ll address the "Markets Will Solve It" claims.

A regular economist will tell you a fable like this:

If a shortage of potatoes occurs either by lack of supply or by growth on demand the market price will rise. This new higher price will signal to the farmers a need to produce more. Supply will rise, meeting demand, lowering the price and bringing the market back into balance.

Let’s see what’s wrong with this apparently correct logic.