I realize you guys have been hearing about "peak oil" a lot lately -- kinda like when everyone began talking about Social Security bend points and wage-indexing and ZZZZzzzz. But though you might be bored, you don't have to be confused. At least, not if you go read this quick and dirty primner on the subject.

Via The Oil Drum.

Update: So long as I'm doing oil links, this tsunami analogy is pretty spot-on. As Grouch & Eligh would say: Time -- time is of the essence.

Update 2: I'm just going to condense today's oil-related posts into this thread, even though they're not all related. Matt, I think, misunderstands something in his piece on Cartel economics:

if every OPEC member cut production by 20 percent they'd all be better off. But any given OPEC member would be even better off if the whole cartel agreed to cut production 20 percent, but then your country went around and cheated on the quota. So if you cut the quota, everyone will just cheat, and everything will stay the same. This is easy to see if you look at how the quotas got so high in the first place. What happened is that they used to be lower, but everyone was cheating, so OPEC raised the official quota up to what everyone was, in fact, producing in order to maintain the illusion of control. So the profit-maximizing case for deliberately provoking a peak oil scenario is a non-starter.

No no no. The problem, now, is that other countries don't have the output capacity to undercut their competitors (partially because the quota, as Matt says, is so high). That wasn't true 15 years ago when Saudi Arabia could flood the market in cheap oil. Back then, a fair number of oil producers could counterbalance any spigot-tightening by their buddies. For instance, when Iraq tried to hike the price of oil to fill the coffers Saddam depleted fighting Iran, Kuwait flooded the market so as to keep their neighbor weak. That was the whole "economic warfare" thing Saddam used when justifying his invasion.

The problem is that the Saudis and Kuwaitis and the rest no longer have the ability to drown the oil market. Their production capacity has significantly dropped, the current output is too high, and their reserves are depleting. They're not going to try and deplete them faster so they can make less money on their crude, and they don't, in any case, have the pumping capacity to completely balance out a 20% cut by Iran or Venezuela. Worse, they may not even have the capacity they thought they had. The Saudi's superfields, which account for 90% of their oil, are depleting much quicker than was thought. That'd be okay if the Sadis were finding new superfields. They're not. In any case, the Saudis are pumping at 10.5 mbd. Over 12.5 will damage their fields. They just don't have the excess capacity to deal with oil shocks.

What that means is if Iran or Venezuela decided to cut production, the Saudis would be able to mitigate the shock somewhat, but Matt's wrong to think they have the pumping capacity to stop it. Further, increased concerns over oil scarcity would ensure that the skittish market proved itself resistant to Saudi comfort -- any major upset right now would roil the long-term valuation of oil, because oil, currently, is seriously undervalued. Markets know the peak is coming and future prices are going to soar, so any hint of instability is going to have an outsized effect on prices, as it'll take into account not just the current scarcity but also expectations of future, more serious, and unending production cuts -- in other words, the passing of the peak. So Kevin's right, it would be $100+ a barrel no matter what the other producers did.

That said, I still don't believe that Iran, Venezuela, or any other country will provoke an oil shock. But it's not because the OPEC cartel can undercut itself -- it's precisely because they can't. Read my post from this morning for more on that.

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