Monday, January 3, 2011

Response of World Oil Production to Increasing Prices

In “Commentary : Will 2011 be a return to 2008 ?”Peak Oil Review. 12 / 20 / 2010,
Gail Tverberg considered Non-OPEC and OPEC oil production over the period 2001-2010 and provided continuous traces of production as a function of oil price (See the
attached). Some interesting trends emerge.
Non-OPEC oil production is largely determined by resource/reserves, as opposed to politics and management. The Non-OPEC production response to oil prices above
$50 is essentially flat, which indicatives that Non-OPEC production could not be
expanded, primarily because of resource/reserves limitations. Thus, the Non-OPEC trace belies the belief of some economists that higher prices always provides a production increase in widgets & commodities. The data provides a strong indicator that Non-OPEC oil production is near its maximum, because price elasticity is essentially zero over the indicated time period. Phenomenologically, oil production increases are just offsetting production declines.
The modest response of OPEC production is not easy to interpret, because OPEC is a cartel. Above the $50 range OPEC adjusted its excess capacity, and the cartel manipulated oil prices to a degree. Nevertheless, their production control did not have a very large overall impact on OPEC production.

Conclusion: Over the past decade increased oil prices did not materially
increase oil production.
R.L. Hirsch. December 23, 2010.

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