Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, September 29, 2005

Oil Futures

Nouriel Roubini says the price of oil is sure to go over $100/bbl sometime in the next few years. He argues,

Global demand for oil is growing at about 2.1% per year or about 2 mmb/d (million barrels a day) per year. So, new net supply has to increase by as much just to maintain prices at current high levels. But since existing production fields get depleted at the rate of over 4 mmb/d per year, new production from new oil fields has to be at least 6 mmb/d per year just to ensure that the additional net demand is satisfied.

So, where will the new 6 mmb/d per year new production come from? We would be very lucky if, between OPEC and non-OPEC producers, we get two thirds of this new production per year available between now and 2010. Thus, based on standard elasticities of demand for oil in face of a highly inelastic medium term supply, this implies that we will oil at $100 per barrel well before the end of this decade.
Professor Roubini is a very smart economist, and so I am reluctant to disagree with him. But as I have posted earlier, citing The Emirates Economist, the Alberta tar sands and the Western US oil shale reserves are potentially gi-normous. [see the item just below this one]

But more to the point: As I write this, oil futures prices over the next five and a half years range from under $67/bbl in the short-term down to near $60/bbl five years from now. If Roubini is right (and for all I know, he might be right), why hasn't his argument been capitalized into futures prices for oil?
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