CIBC's new report predicting $200 a barrel oil by 2010, 7 dollar-a-gallon gas, and a massive decrease in the number of cars cruising along American highways over the next ten years is worth reading just for the inherent shock value. (Thanks to Environmental Capital for the tip.) But I was most taken by the first two lines:
Recent announcements from OPEC and China won't be sufficient to hold oil prices in check. The additional 200,000 barrels per day pledged from Saudi Arabia is a pittance compared to the four million barrels per day that depletion will hive off world production this year.
We commonly hear that the reason oil prices have risen is rapid demand growth in developing countries, particularly China and India. But the decline of mature oil fields throughout the world is a much greater source of demand for new oil supplies than the growth of end user demand.
End-user demand growth -- new Chinese and Indian car drivers, etc -- is projected at about 800,000 barrels per day for 2008. Measured against the Saudi promise of 200,000 new barrels a day that might seem like not that much. But when you add the four million barrels a day that are lost every year because of declining production in existing wells, you're looking at a pretty significant gap to make up. It's like trying to fill a bucket with a hole in the bottom. It's a losing proposition.
If you're looking for a handy metaphor to understand why oil prices are so high that doesn't require any position at all on the question of how much speculation by energy traders should be blamed, here it is: We're running faster and faster not just to stay in place, but to keep from falling further behind.