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The New Economy

Oil prices will rise as supplies tighten? Hardly.

Oil prices, which fell below $97 a barrel on Monday, are not poised to surge in the long run because long-term production is declining. Better technology and, if needed, higher oil prices mean the long predicted peak in oil production is a long way off. 

By A. Gary ShillingContributor / February 6, 2012

Fuel prices are displayed at a Chevron gas station in Phoenix in this October file photo. Oil prices dropped below $97 a barrel in trading Feb. 6, 2012, as concerns ratcheted up that Greece might not reach a deal to avoid defaulting next month.

Joshua Lott/Reuters/File

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What's the deal with oil prices?

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Most commodity prices are collapsing. Copper is down 18 percent from its February 2011 peak. Corn prices are off by a quarter since last summer. Natural-gas prices are half the level of six months ago. Yet crude oil, down from its April peak of $114 per barrel, has risen by a third from its October low of $76 to again flirt with the $100 mark.

On Monday, they dropped below $97 on concerns about the lack of a deal on Greek debt. 

Some of the recent increase may stem from tensions with Iran. But much of it seems to be a general view that crude oil is a different kind of commodity that is in perpetual danger of being in short supply, given its essential nature in modern economies; the chronic instability of oil-producing countries in the Middle East, Africa, and South America; and the peak-oil thesis, first predicted by M. King Hubbert in 1956, that global oil production inevitably will dwindle.

I don't buy it. In fact, I think that human ingenuity, constantly improving recovery technology, and higher prices (if needed) probably make any current estimate of recoverable oil far too low – and too static. Actually, global production capacity will rise from 92 million barrels a day in 2010 to 110 million in 2030, forecasts Daniel Yergin of IHS CERA, a forecasting firm in Cambridge, Mass.

That 20 percent jump would more than cover the global rise in demand. Hubbert's peak oil followers tend to discount the idea that reserves are usually underestimated. The US Geological Survey says that 86 percent of US proven reserves are additions to original estimates.

Add in some significant new finds, including Petrobras's huge field off Brazil's coast, a large discovery off French Guyana, and Statoil's potential 1.5 billion-barrel oil field in the North Sea. Then there's the oil boom in North Dakota, which now produces more oil than OPEC member Ecuador.

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