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Peak Oil - Oil Prices in an Era of Plateau [Dec. 15th, 2007|01:00 pm]
Aaron Wissner
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Peak oil, and in particular, the current plateau in oil production, has had a dramatic impact on the price of crude oil. Over the past ten years, the price has increased from a low of $10 per barrel, to a high of over $90 dollars per barrel. This is an increase of over 10% per year, although most of the increase has occurred during the past four years.

The week by week analysis of the spot oil prices is useful to see the trend, but even more interesting, is taking the data, and creating a six month rolling average. This averaging helps to smooth out the curve and show the trend in the price changes. It also gives a feeling of how the price has changed during various time periods.

Notice that the data shows the average for the previous six months. For businesses, this could be a major factor in reports such as quarterly earnings statements, as during some quarters, the average price of oil will have been higher or lower. Another interesting bit about this chart is that there was a very significant dip in the price level during the 6 months from about October, 2006 until March, 2007. This was also reflected in gasoline prices which hit a local low around January of 2007, in sync with the oil prices.

The final chart shows a 12-month rolling average for oil prices.

The significance of a 12 month rolling average is that this evens out the variations in price level due to seasonal differences. This also represents the average price that an oil purchaser would pay during a fiscal year, assuming that they buy regularly in constant quantities at the spot price. The most remarkable portion of the chart is the leveling out of average price during the 2006-2007 time frame. Prior to that, the price of oil was increasing rather steadily, at more than a 25% annual rate. Then, for over a year, the rolling average did not increase. More recently, the average has again started to rise, although the rate is faster than the previous period.

Given that the oil supply has been at plateau since late 2004, one wonders, what is leading to the increases in prices, and the odd leveling of the price increases for the one year period? Was this the result of inflation, a change in demand brought about from economic recession, the result of the fall in value of the US dollar, something else, or a combination of factors?

In any event, there are two current trends.

First, the supply of oil is currently static or at a plateau of about 84.5 million barrels per day (again, using a 12-month rolling average). This may or may not be the peak of oil production. That will not be certain until the decline has been in progress for several years.

Second, the price of oil is currently experiencing a rapid rate of increase, despite the recent volatility in the prices, which tends to obscure the overall trend. The 12 month rolling average helps to illustrate what the volatility is concealing.

Both trends will surely have a significant and perhaps profound impact on the year ahead.

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