High Oil Prices Here to Stay?

This is a somewhat old article by Ronald Bailey, but I thought it is still somewhat relevant since oil are still well over $70 a barrel. The gist of it is that right now oil production is on a plateau and possible at its peak.

The resurgence of resource nationalism bears a good bit of the responsibility for the glum oil supply projections-what I’ve previously called “political peak oil.” Seventy-seven percent of world oil reserves are owned by national oil companies. Unfortunately, national oil companies are located in technologically backward countries without access to world-class production expertise and adequate supplies of capital. As the IEA diplomatically puts it, “Often political and social spending needs grow to the point where oil exploration and development investment is compromised, in turn reducing oil and gas exports.” And this is happening. Major oil producers such as Venezuela, Mexico, Russia, and Iran are using oil revenues to bribe their people and not investing enough to maintain future oil production.

To make matters worse, Venezuela is seizing a number of oil production projects operated by private international companies. Russia has done the same. Few investors are eager to invest in oil production in Iran and Iraq given current geopolitical realities. The IEA projects that there will no net expansion in oil production in Venezuela, Iran, Iraq, and Nigeria between now and 2012. In addition, spare global production capacity is currently at 3 million barrels per day and is expected to fall to 1.5 million barrels per day by 2012. Thus any disruption in production anywhere in the world will boost prices.

I like Bailey’s idea of a political peak in oil production. The situation in Venezuela with Chavez nationalizing more and more of the oil industry there and his other ill-thought-out policies could lead to a decline in Venezuelan oil production. As the country finds itself with less and less in the way of staples such as food, the population will require larger and larger bribes from the Chavez government and/or increases in the number of jack-booted thugs needed to keep the population in check, or both.

And even if we are at the peak in oil production for non-political reasons the higher prices are probably a good thing. The higher prices will encourage more conservation and lead to more investment in alternative fuels. Of course, nobody likes higher prices so look for the usually environmentally friendly Democrats to suddenly forget their environmentalist constituents and start bemoaning the higher fuel prices and that “something” must be done to lower prices.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. markm says:

    “The higher prices will encourage more conservation and lead to more investment in alternative fuels”

    That may be true elsewhere but here in Michigan that doesn’t appear to be the case. Gas is down to $3.09 from $3.39 and at either price the roads are packed. To achieve conservation (at some economic price) the price is going to have to go much higher IMO.

  2. MrGone says:

    Careful what you wish for. Peak Oil, whether political or geological, implies the end of our current period of growth and the beginning of permanent decline. There are very simply NO substitutes for oil, real or imagined (well except fusion).

  3. Steve Verdon says:

    I don’t buy the “there are absolutely no substitutes” line of argument. History is littered with these kinds of predictions. As for a political peak, there is nothing that says it has to be a permanent peak unlike with a geological/physical peak.

  4. floyd says:

    So how does the price of gasoline in 2007 compare with 1971 or1981?
    How about the price of a house, or car, or average wages? Or compared to the consumer price index?
    I hate to say this, but I’m guessing that gasoline isn’t as high as some of us think it is.