One of the characteristics of any depletion industry (be it coal, oil or Natural Gas) is the ups and down in prices. What happens is as demand goes up for a product, prices for that product goes up. Producers of that product than start to bring more product on line. This leads to over production. The overproduction creates a situation of excess supply and the price drops. As the price drop producers stop producing. At some point production drops below demand and the boom bust cycle restarts.
To compensate for this some mechanism is used to level out the Booms and Busts. In the oil industry that was Standard Oil prior to its break up in 1912 (and in many ways for years afterwards). Remember Monopolies do NOT like excessive prices, the big profit is in charging just a little bit extra (Often no more than 10% extra) but while over the amount the price should be.
Starting in the 1930s the mechanism to control the booms and bust in the oil industry was the Texas Railroad commission (which controlled Texas Oil production and thus the price of world wide oil). The Texas Railroad Commission lost this power in 1970 when US Domestic Oil Production peaked and started to fall. The Texas Railroad Commission was NOT able to control the price of oil for Texas was producingall it could and still could not meet demand. Demand was meet by OPEC who found out in the 1970s that OPEC was the world's "swing" producer. The term "swing producer" is used to describe the producer who is setting world wide price by controlling the level of production. Till 1912 that was Standard oil, before 1970 it was Texas and the Texas Railroad Commission, since 1979 it has been Saudi Arabia and OPEC.
One of the problems that manifested itself in the early 1970s (When Texas lost its status as the “Swing producer”) was the growing fluctuation in the price of oil. This did not stabilized till Reagan and the Saudis accepting that their were the World’s Swing oil producer.
When the Saudi’s lose their status as the World Swing oil producer than you again will have wide variation in the price of oil. The problem being is the Saudis will lose control of Oil production (and thus price) sometime around world wide oil production peak (the point when world wide oil production peaks and starts to fall, and to keep falling for about 100 years when oil will be depleted). They is some debate as to when this will happen, but the variation in price will start just as oil production peaks and than return to a series of Booms and Busts in price. Remember to control the price of oil you control the production of oil. This is easy when production is increasing, but fails when production is Decreasing. The reason for the failure is sooner or later the “real” production level will drop below the level set by the Swing producer and the Swing producer will lose control of production. Thus it is almost impossible to control the booms and bust in a declining depletion industry.
What has this to do with the present oil situation? We are approaching peak production. The only question is when? Three dates are given (and these dates may be off 2-3 years). The latest is 2020 and that assumes OPEC is telling the whole truth on its oil capacity (Please note several geologist point out OPEC had VERY good reasons to LIE about oil production Capacity and apparently has done so since the mid-1980s). The majority view is 2008 (and this assumes that OPEC is lying, but the Seven Sisters were telling the truth on oil Capacity when their control the Oils fields of OPEC prior to the 1970s). The third estimate was 2002 (Please note we are still within the error rate of the prediction peak of 2002. This estimates is based on the presumption that the Seven Sisters had good reasons to overestimate oil production capacity. This is supported by the fact none of the Seven sisters complained much when the fields were taken over in the early 1970s unlike what happen in Mexico in 1938 and Iran in 1952. Could it be the seven sisters were over paid? I.e. paid on over inflated oil capacity levels? We will NOT know for decades, if ever.)
Thus if we are near peak, than NO ONE will control the production of oil and thus no one controls the price. This will leads to wide variation in the price of oil, one month it may be $2 a gallon the next $1. The third month $5 and the fourth month back to a $1. This may be happening now.
Now in real term the present price peak in the East is being caused by the shut down of oil refineries do to the Black out last week. The destruction of the Iraqi pipeline should not affect our prices for another four weeks (The general rule is it takes four weeks for a price hike to get from the well head to your gas pump, eight weeks for a price drop).
Thus part of the problem is the upcoming oil production peak, the question is it the MAIN reason? Or do we have some time left?
http://www.hubbertpeak.com/http://healthandenergy.com/oil_crisis.htm
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