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Thursday, November 06, 2008 4:02:16 PM
Put another way, the past 6 years, oil production was relatively flat regardless of price -- even when prices were sky high, nobody could produce any more oil than they already were.
Indeed, many actually produced significantly less oil despite high prices because of depletion.
So that meant that "new" oil had to come into the market to meet demand and the cost of that "new" oil is significantly more expensive to find and produce while current production continues to deplete 6%-9%/yr.
If companies have no incentive to find and produce more "new" oil, then it will be almost impossible to quickly ramp production up to the same level it was the past 6 years, causing quite a crunch.
Make no mistake... the economy and demand for oil will eventually return, and much sooner than we are likely to suddenly ween ourselves off of it... if we are unable to get daily oil production back to levels of the past 6 years?
And the longer prices stay low, the more production will disappear and that lost production is both time-consuming and expensive to bring back once you've stopped... you can't simply turn a valve and begin flows again.
In the short run, demand has crumbled... but I posit that demand can increase (and eventually will) much faster than production can increase at the margins.
And at these prices -- cheaper than we've seen in several years in SoCal -- it seems unlikely that demand will stay "crumbled" long as people simply revert to old habits and little is done to actually replace oil/gas with some alternative on any scale.
Jim
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