Oil Futures and the Future of Oil

One possibility that has run through many of our minds is whether the oil price run-up over the last two years might be the first signs of an inevitable eventual decline in annual global petroleum production resulting from exhaustion of the world’s oil fields. Energy Outlook, Daily Kos, Angry Economist , and WhirledView, to pick a random selection, have discussed this, and indeed there are entire blogs (e.g., The Oil Drum ) and metadirectories like Hubbert Peak and The Dry Dipstick devoted to this theme.

If this were the concern motivating today’s oil buyers and sellers, however, we would not be seeing a projection of declining oil prices going into the future but instead a rising price path reflecting investors’ understanding that oil would be becoming an increasingly scarce and valuable resource in the years ahead, according to the principles first articulated by Hotelling in 1931 (see for example Brown and Wolk, 2001 ). It also is hard to square with the fact that we observed a dramatic acceleration rather than deceleration in global petroleum production in 2004.

The pattern in the futures prices instead suggests that the consensus opinion on the part of commodity speculators is that we are going to see either supply increases or demand decreases a year or two down the road. Optimism about Iraq I suppose is one scenario that might be used to motivate the first view. But I’m inclined instead to look for developments coming on the demand side.
Econbrowser via EnergyBulletin.net