Why oil costs over $120 per barrel

With oil reaching $135 / barrel, Oil Drum readership exceeding 30,000 unique visitors per day and many wild stories circulating in the MSM as to why oil prices are so high this post strives to explain why oil prices are rising exponentially.


The most significant feature of the chart up top is the dog leg in production growth in 2004. Prior to then the flow of new oil field projects combined with increasing utilisation of spare capacity allowed global oil production to grow and to meet much of the growth in demand.

In 2004, OPEC spare capacity fell close to zero (see below) and the world struggled for a number of reasons to bring on new supply to compensate for decline (see below). The slowing of production growth has meant new supplies are insufficient to meet growing demand and the price has gone up to balance the books. Higher prices stimulate conservation that may take the form of fuel efficiency (driving a smaller car) or abstinence (poor people being priced out of the energy market).

The Oil Drum: Europe