The Crude Reality Of Peak Production

If crude oil can double in value with the world in recession, just imagine what will happen when demand picks up. Prepare yourself.

Conspiracy theorists want to blame the meteoric rise of oil from just above $30 a barrel last December to $71 this week on speculation by Goldman Sachs and a bunch of hedge funds. Others are sure that China’s $600 billion stimulus program is to blame, while still more worrywarts point to Nigerian rebels blowing up pipelines in Africa.

Then you have the ideological fanatics like CNBC’s Larry Kudlow, whose rah-rah mantra is “drill, drill, drill” as the antidote to the doubling of oil prices and the coming scourge of inflation. In other words, it’s the damn absence of drilling that’s driving crude prices higher and threatening the economy cum stock market.

Don’t believe the barrage of short-term noisemakers. Some experts believe supply is running far ahead of demand–but this is an extremely short-sighted view that fluctuates fast and seems to be ending as oil and gasoline inventories begin to get tighter. Understand that the oil producers don’t want prices to soften.

“The formerly tight balance between world demand and the world’s capacity to produce oil has given way to the largest surplus production capacity in 21 years, about 6.5 million barrels a day,” says Croesus’ esteemed friend Daniel Yergin, a thoughtful geopolitical expert and founder of Cambridge Energy Research Associates. “We are back to 1988 in terms of spare capacity.”

Forbes