Even If Oil Hits $90, OPEC Won't Increase Production  

The Business Insider reports that OPEC is expecting oil at US$75 a barrel by the end of the year - Even If Oil Hits $90, OPEC Won't Increase Production.

Oil prices could reach $80-$90 a barrel by early next year, but OPEC will not increase its output until a huge amount of over-supply has been absorbed, the group's Secretary General said on Tuesday.

OPEC officials have been nudging up their price aspirations since Saudi Arabia's oil minister said last week an oil price of around $75 could be achieved later this year and would not undermine a tentative global economic recovery.

"The price will go to $80-$90 maybe at the beginning of 2010," OPEC's Abdullah al-Badri told the Reuters Global Energy Summit.

"I don't think the price will go down... By the end of the year we'll see $75. $80-$85 is possible -- not with the demand we see at this time, but if demand picks up month after month, then maybe we'll see this price."

Last week, Badri said he expected to see oil at $70 to $75 a barrel by the end of this year. U.S. crude has already more than doubled from a low of $32.40 reached in December, its weakest in nearly five years, to around $68 on Tuesday.

Badri made clear the Organization of the Petroleum Exporting Countries -- which has said it would reduce production by 4.2 million barrels per day (bpd) since September last year -- was not ready to increase formally its output ceiling.

A drop in oil inventories in industrialised countries to around 52 days' worth of future demand from around 62 days now would be needed for the group to consider doing so, he said.

"OPEC will move and act when they see that overhang reduced to a normal level and they see that demand is really picking up, then OPEC will move. At this time, there is no real threat to the market. There is no shortage of oil."

As I've mentioned before, one of the big problems with reaching peak oil isn't just that oil prices will go up, but that they're likely to spike up and down fairly violently. In 2006, for example, demand for oil pretty much bumped up against the total available supply, which meant that even a small amount of additional demand was enough to send oil prices spiraling up past $150 in little more than a year. The ensuing recession reduced demand by only a modest amount, but that was enough to cause oil prices to plummet to under $50 in the same timespan. And this isn't just a demand-side problem: a small glitch in supply could easily have caused the same kinds of violent price spikes.

As a general rule, the world can handle high oil prices. In fact, to the extent that high prices get us off our butts and looking for cleaner, more sustainable sources of energy, high oil prices are a good thing. But what the world economy can't handle is constant, huge gyrations in oil prices: nearly all of our recessions since 1973 have been jump started by a sudden spike in oil prices.

So what happens next? Via Ryan Avent, Paul Kedrosky points us to this projection from McKinsey, which shows that demand will once again bump up against supply very shortly: probably within a couple of years, but almost certainly within four years at the outside. And when that happens, prices will once again rise unpredictably. A strike in Venezuela could cause oil prices to double in less than a month. A rumor of new supergiant field or a small recession could cause a subsequent collapse. Price changes of 100% in short periods will become common.

You can probably already figure out where this post is going, can't you? Wild spikes in oil prices are very bad news for the global economy, and the only way to avoid them is to permanently reduce global demand for oil so that we once again have enough spare pumping capacity to keep prices relatively steady — high and rising, perhaps, but at least rising fairly predictably. That means we need higher mileage cars (global warming isn't the only reason for stronger CAFE standards), electrification of transportation, better conservation and efficiency measures, and more investment in solar, wind, and biofuels. And all this needs to be done fairly quickly if we want to avoid an economy permanently at the mercy of OPEC oil. Even 2013 isn't that far away.