OPEC struggles to control peak oil fluctuations

As the global economy tumbles the price of oil has plunged down to about US$67 a barrel. As I’ve noted previously the dramatic falls and rises in price are indication that we are hitting peak oil. But, as importantly, peak oil is also playing its part in causing the crisis, as Energy Bulletin notes:

The US balance of payments deficit has grown rapidly during this decade, and one of the big drivers of that has been the rising cost of imported oil and other petroleum products. In 2002 we spent $102 billion importing oil, but that figure rose to $300 billion in 2006, and to $328 billion last year. Those imports (along with Jim Kunstler’s salad shooters and all the other things we buy) had to be financed, to the tune of $2 billion a day by last year. We convinced the Chinese, Japanese, and many others that our MBS were safe because they were sorta guaranteed (wink, wink) by Freddie Mac and Fannie Mae. We needed the oil, so we needed product to sell to finance our “addiction.” Our suppliers wanted bonds, the government deficit wasn’t large enough, so we created an endless supply of MBS to sell. Nobody – the government, the American people, the Wall Street crowd, mortgage brokers, home builders – wanted to take away the punch bowl, or look too closely at what was being produced. Rising oil import volumes multiplied by rising prices contributed to the crisis we are now experiencing.

This leaves oil producers in a quandary. They can’t afford to have the price fluctuating (Especially not downwards) at just the same time as cost of extraction is rising. Interestingly the Organization of Petroleum Exporting Countries, OPEC, announced two weeks ago:

Amid growing unease over this situation, the Organization of Petroleum Exporting Countries has decided to hold an Extraordinary Meeting of the Conference on Tuesday, 18 November 2008, in Vienna to discuss the global financial crisis, the world economic situation and the impacts on the oil market.

The Organization reiterates its determination to ensure that oil market fundamentals are kept in balance and market stability is maintained.

Then one week ago:

It has been decided to re-schedule the Extraordinary Meeting of the OPEC Conference. This will now take place at OPEC Headquarters, Vienna, on Friday 24th October 2008, rather than on 18th November 2008, as previously announced.

That gives a good sense of their urgency. OPEC is now going to try to drive the price back up to somewhere between US$70 and US$90 a barrel. As this market advisory website notes:

OPEC seems determined to take back control. The crash back to $70 reduced cash flow so severely that everyone is now paying rapt attention and if you can believe the news reports they are ready to take quick and decisive action once again. The fear prompting their call to action this time is the rapidly accelerating global recession prompted by the financial crisis. Demand has been falling sharply over the last eight weeks and some believe 2009 could be the first decline in demand on a global basis since 1983.


All of these moves are symptoms of peak oil although most would not believe a temporary excess in production is peak oil problem. Most peak oil theorists believe in an extended plateau where production and demand are nearly equal. As demand briefly exceeds production prices rise sharply. As prices rise demand declines sharply as we have seen over the last few months. Production suddenly exceeds supply again and prices drop sharply in response… The pattern then repeats over and over with overall demand eventually exceeding production on a permanent basis. This could take numerous cycles before the eventual permanent decline.

12 Comments Posted

  1. Optimist, You need to understand how elasticity affects the behaviour of the supply and demand curves to appreciate how peak oil will cause the same dramatic prices booms and crashes that housing has experienced in areas with limits on subdivisions.

    A simple explanation of the latter effects can be found here

  2. > As I’ve noted previously the dramatic falls and rises in price are indication that we are hitting peak oil.

    Can you please provide a link to your musing on this subject? Surely you are not suggesting that falls in price are also due to peak oil?

    If OPEC succeeds in cutting production without making Iran and Venezuale going bust, will this mean that peak oil will be stopped? What exactly causes peak oil in your mind – the increase in production or the reduction in production?

  3. OPEC must be over the moon.

    I’ve previously described them as a “spent force”, given that oil was being produced at full tilt just about everywhere it could be, and OPEC, despite much mouthing off, couldn’t actually deliver sufficent additional oil to reduce price. So it just didnt matter any more what OPEC thought they could do.

    Now look where we are. Demand has dropped significantly so there is no longer a day-on-day shortage, and oil prices have tanked (oops – bad pun). So once again, OPEC gets its hands on the price of oil.

    Amazing. The global economy falling to bits ahead of peak oil is an event I certainly hadn’t considered a little way back, I’d expected it the other way round. But here we are.

    Of course if the price of oil stays too low, then many sources of supply will be mothballed as too expensive. You can do things when oil sells for $120 that you cant do when its $50. So this could be the start of a continuous bumpy ride…

  4. “A graph that looks like a gentle arc, rather than an jagged mountain range…”

    For oil? Must’ve been for Extra Virgin Olive Oil. Perhaps Frog can report the weekly or monthly average price for the last twenty years. Ten years of gentle arc – downwards, followed by ten years of jagged mountain range upwards. She get’s real steep past Candy’s Bend, mate.

  5. If I owned the oil I’d be looking for a price increase too! After all, the buggers who use the stuff just wrecked my investment portfolio, by insisting that people who couldn’t afford them be allowed to buy houses on the never never. Now I need to top up my resources again for my great grand children, who will need the money when the oil runs out.

    You see, the earth’s strata is multi-layered, and right now we can only get out the energy that’s within twelve miles of the surface, but the GGKids will be able to buy better technology if we keep the money flowing now, and sell heat-pump energy from magma. After all, there’s no NIH syndrome in the desert!

  6. Greater variability or a steadily rising price on the back of decreased supply is an indication but I am sure I still don’t understand how you came to agree “We is doomed! Doomed I tells yah!” with us 🙂

    Peak Oil is not about price. Price reflects the demand as well as the ability to supply. Peak Oil is about the ability to supply, and we aren’t doomed to anything but change. The only way it becomes a bad certain fate as opposed to a certain fate is if we don’t accept it and then do nothing to compensate for it.


  7. Lack of rapid fluctuations, BJ….

    A graph that looks like a gentle arc, rather than an jagged mountain range…

  8. BP

    Where does anyone but you say that? And if the price is steadily rising as the supply decreases then it isn’t actually steady.

    I think you overreached here.


  9. “No. It seems a steady price also points to peak oil. ”

    Who’s made that claim? Not any of the peak oil people I’ve read.

  10. “As I’ve noted previously the dramatic falls and rises in price are indication that we are hitting peak oil. ”

    And if the price didn’t fluctuate wildly, the opposite would be true? 😉 No. It seems a steady price also points to peak oil.

    Kind of like temperate rising AND falling are indications that AGW is a big problem…. 😉

    Nice to have a bet each way, eh….

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