Why are Oil Prices so High? An Energy Primer

10/21/2008 Update:Supply and Demand have now driven prices down significantly, as fears of a global depression, and reduced driving worldwide, have led to decreased use of oil. How significant was speculation in the runup to $147 oil? Certainly it played a part, just as speculation played a part in the dot com boom and the housing bubble. But oil is still up 700% from its lows around the turn of the century, and that’s due to the fundamentals explained further below.

05/22/2008 Update: As this article has become far and away my most-read, and since oil is now cruising towards $140 a barrel, I thought an update was deserved. For those without the time to explore the links below, oil is rising for a simple reason: oil production has not risen significantly since 2005, while demand for oil worldwide continues to rise rapidly. The simple law of supply and demand is moving oil prices up, and no number of Congressional hearings will change that.

With news of crude oil prices topping $110/barrel today, it’s no surprise that the price of gasoline and oil are once again on people’s minds. As an introduction, here are a few links on the global transportation energy (oil) situation today, and on various risks that we might face in the future.

What is Peak Oil? – This Wikipedia article on peak oil outlines the notion that oil production must someday hit a peak, since oil is a finite resource drawn from Earth’s crust.

Export Land Model – Jeffrey Brown, an independent oil geologist, and others at The Oil Drum provide insight into the effects of a simultaneous plateau or drop in oil production coupled with rapidly rising oil consumption in oil exporting countries. The ELM is a simple model that graphically illustrates some of the forces driving energy prices rapidly higher.
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