I can't imagine how high oil would be right now if we had a cold winter.
If I was your average Joe, that knew nothing about the coming oil problem and saw these graphs I would be horrified.  Even someone saying we will have 70 dollar oil for the next 10 years and peak won't hit till 2015, would be considered a Cornucopian in my mind.

This isn't a hard constraint. There are lots of easy ways to commute with much less gasoline: ride a scooter, van pool, take the bus, bicycle, telecommute etc. Look at NY during the transit strike. They forced every car coming into Manhattan to carry at least 3 people, and people arranged ways of dealing with it in a day or two. If a similar system were announced nationwide in the U.S., the oil speculators would be trampling each other, running for the exits. There are lot of non-price ways of adjusting elasticity. See Saving Oil in a Hurry from the IEA. So I don't think we can really make the assumption that demand will always be inflexible. How flexible will it be if the government makes carpooling mandatory?

As you have stated, the real question is what price is required to cause people to actually use less taking into consideration the additional demand of China and India. My guess is that it is a lot higher than anyone now contemplates and well north of $200 by 2010.

On the bright side, $400 oil would certainly encourage conservation.

If you look at demand, for gasoline, or oil, it is still growing as "normal" - even with the steady long-term increases of the last 3.5 years. Sales at GM and Ford are down, but Americans are still buying SUV's. When gasoline spiked to $3.25 this fall Americans reacted, but we cannot tell how much they would have gotten used to the price and reverted to old behavior - because the price went back down.

Until gasoline sustains $3.50 (putting oil at roughly $100-$120) we won't be able to see much. Comparisons to earlier points in history are largely irrelevent, since it is a different world in so many ways.

I encourage those of you who are doing these excellent analysis/graphs of price/supply/demand to stop looking at the daily price of oil, since it contains so much temporary "noise." Try using a 26-week moving average of the Nymex-Futures/WTI Spot price. It provides a nice, smooth line and I believe has a very healthy built-in measurement of the long-term, economy-effecting component of price.

Over the last 3.5 years this price has basically never gone down, except for a couple of two- or three-week periods. It also shows that the rate-of-increase (acceleration) has gone through several phases, and is currently not at a high.

I'd be interested to know how the dollar being held up artificially by China, Japan and others plays into these price scenarios.

Thanks for any info you have!

I don't see how this conclusion can be made from the graphs.

http://www.theoildrum.com/uploads/supply_demand2.jpg

I see the data point for 2005, it is the last purple dot, at about 84 MBD and $56. Now you're going to assume that demand increases at 1.5 MBD, and you will use demand elasticity of -11.50$/MBD to compute the 2006 price. You also say you will "assume production can grow at the same rate as 2004-2005" but you don't say what that is. Looking at your first chart it looks like it went from about 82 to 84 MBD, or an increase of about 2 MBD, greater than your demand increase.

So if production is increasing faster than demand, how do you get a $12 increase in price? I don't understand your methodology at all. Are you assuming a certain shape for the production curve that you haven't shown here?

If I read your chart literally, then in 2006 if price were at the same levels of today you would predict 2006 consumption of about 87 MBD for a 3MBD increase in one year, which would be unprecedented. That doesn't make sense to me.

But given that we are at or near peak, this means that we are still pumping a LOT of oil out.  This coupled with any number of factors (can you say housing bubble) seems to me there could be one more bust/boom cycle left in the system before the terminal decline.  What would be the forecast if we hit a major recession/depression for 5 years, demand plummets, prices??  If global demand falls to 75MBD, then starts to rebuild, how long before we again hit the readjusted ceiling of supply.  WebHubble had done something like this for the historical shocks in his model, but I haven't seen a future look on this scenario.

-Ptone

All complex real-world systems are non-linear. Using linear extrapolation there is not only useless, but plain deceptive.

From the look of the post it seems that the poster knows what he is doing - thus I can only deduce that he knowingly uses "scientific look and feel" to push his "end-of-world" agenda onto gaping and awing (Ohhhh...!! science...!!) laypersons. Disgusting.

FYI: no, I am not a peak oil sceptic, neither I am a paid slave of an evil oil corporation. Personally I am convinced that humanity should get out of the fossil fuel mousetrap ASAP.

But! I wouldn't tolerate "scientific" fraudulence.

Another adjustment I would suggest, for modeling future demand growth, is to look at per capita consumption. One reason demand is growing is because human population is growing. The latest figures I found are that current population growth rates are 1.4% per year. This rate is declining slowly, it was about 1.7% in 1980. See the green line in this chart, although note that the right half is an extrapolation:

If you model demand growth at constant price as population growth plus some delta, then include some low estimate for demand elasticity, I think that would be a good starting point.

I'm searching for papers which attempt to explain this anomaly, but meanwhile I do have some insights from what I have read which may shed light on what is likely to happen in the future.

Hotelling's reasoning starts like this. Suppose you are an oil producer and somehow you know what the price of oil will be for the next several years in the future. You've got a crystal ball, or an analysis like what we do here all the time, and it gives you a good idea of what will happen. And suppose your goal is to maximize the "net present value (NPV)" of your income.

NPV is an economic concept which derives from the observation that people would rather have a bird in the hand than two in the bush. Cash today is worth more than cash in the future. This is modeled by assuming that there is a "discount rate" which measures how much less future income is worth than the same dollar amount today. Generally the discount rate is taken to be approximated by interest rates (somewhere between the highest safe interest rates on deposits, and the lowest available rates for loans).

Now suppose that you knew that future oil prices were going to increase at a steady percentage rate. Let us consider what you will do if that rate is higher than the interest rate (aka discount rate). In that case the NPV of your oil will be greater in the future than it is now. So your incentive is to hold off on selling it now, and to wait and sell it in the future. OTOH if oil prices are expected to climb slower than the interest rate, the NPV of future oil will be less than today, so you will try to sell more oil today and not save it for the future.

Given that all oil producers act this way, it tends to move the expected future price increase to equal the interest rate. In the first case above, where prices are climbing faster than that, people will hold off selling today and sell more in the future. That will increase today's prices and lower future prices, decreasing the steepness of the oil price curve. In the second case, where oil prices are climbing too slowly, people will sell more today and have less to sell in the future, so prices will come down today and go up in the future, steepening the curve. In either case, profit maximizing oil producers drive the expected future price curve to equal the social discount rate, aka the general interest rate.

So this is the basic Hotelling prediction, that oil prices (and for that matter, prices of every other exhaustible commodity like coal, copper or gold) will rise on a path that matches the interest rate. Needless to say, this has not happened. Adjusted for inflation, prices of most commodities have been roughly flat over the industrial age. (See Chart 1 for some examples.) There has been no long-term exponential increase in prices.

There are some modifications that can go at least part way towards explaining this. One possibility is monopoly. If a cartel controls the price of the commodity, Hotelling shows that the price will rise more slowly as the cartel restrains production. Due to decreased production, prices are higher and profits are greater. As the reasoning above describes, given relatively flat prices companies would like to produce more in the present, but the cartel restrains their actions. The net result is that the industry makes more money and we don't see the kind of price increases that the simple Hotelling model predicts.

Oil is a commodity which has been governed by cartels almost continually. For the 1st half of the 20th century, the United States was the most important oil producing and exporting country. During that time, government regulations restricted production and kept prices high. Not until the 1970s were these restrictions removed. At just that time, OPEC became important as the major oil producing region, and of course it has functioned as a cartel ever since. It's possible that these government restrictions on production can explain the failure of the Hotelling model.

Now, however, things are changing. Just as in the 1970s the U.S. hit peak production and restrictions were removed, so now we find that OPEC is running out of spare capacity. When this happens, we may find for the first time that we have the conditions necessary for the Hotelling model to work. The cartels will no longer be in effect, and we will see a wild free-for-all, every country for itself in terms of trying to maximize the profits from this declining resource.

So what will happen? Look at the analysis above. Hotelling predicts that if producers expect oil to be more valuable in the future, if they think the price will climb faster than interest rates (about 5% per year today!), they will reduce production now because they know that oil will be worth that much more in the future. This will cause prices to rise quickly in the short term, until an equilibrium is reached. After that point, prices will settle on the Hotelling curve and climb at this modest ~5% rate until the resource is exhausted or prices get so high that people are forced to use inferior substitutes.

So the prediction is somewhat different from the usual Peak Oil scenario of continual high price increases. Instead we would expect to see something of a "step function" in prices, as the old order breaks down and we switch to a model where everyone admits that we are on a long term production decline. We will see a sudden transition to high prices, high enough that demand will match ever-diminishing supply, with only modest ongoing price increases from there.

So how high would prices have to go to reach this condition? That's the $64000 question, isn't it. I will have to think about this some more and study more of the literature before I could hazard a guess.

If we assume that the OPEC countries have overstated their proven reserves by 300+/- billion barrels, then Peak Oil must have already occurred.  Agreeing with this assumpition, Hubbert was probably correct in his calculations that world wide Peak Oil took place in the late 90's.  

World wide oil supply has been flat several years.  According to Matthew Simmons, peaking is what can be done for several years or even a decade.  What might be interesting in forcasting future oil prices and supply, is dealing with unknown variables.  These variables will include Geo-political events, terrorism, and unexpected collapse rates of large oil fields.

Advances in technology in rapid oil production, may have robbed Peter to pay Paul.  By that, forcasted future supply from large fields may not be possible, due to the fact that the water and gas injection systems have made normal bell curve formulas inaccurate.  We are seeing 10% decline rates in the North Sea fields.  The Burgan field in Kuwait is in decline.  Mexico's large Cantarell field is also in decline.  If these large fields show decline rates of production of 6-10%, the price of oil will skyrocket.

Many people are predicting Peak Oil to have either hit Thanksgiving 2005 or up to the next several years.  I believe we Peaked several years ago.  As soon as Ghwar, Burgan, Cantarell show signs of rapid collapse rates (as well as others) the world will realize Peak Oil has come and gone without even a whimper.  I believe Matthew Simmons has even stated that we can see 30% collapse rates in the Saudi fields due to their intensive water injection system.

Unfortunately, all bets are off for a soft landing in the U.S. economy.  Those with enough wisdom will take advantage of the few years left before the economic collapse hits and get their house in order.  Because today....individuals still have the power to make decisions about what they want to buy, where they want to eat out, where they want to live.  But, within a few years...this opportunity will be gone and those who did not make plans will be caught up in a economic depression so severe that just surviving will be a luxury.

Of course, as in history, most people will fall in the latter category.  

Disclaimer:
I am a mathematician and not an engineer nor an economist.
This is also my first post so be kind to me.
I will try to formulate several of my thoughts below, some related to your post and some not.

First, I have no doubt that PO is imminent or avoidable. The western world is too dependent on cheap liquid fuel.

Obviously, it is impossible for consumption to be greater that production and if production is plateaued it means consumption can not increase (except by interference from strategic reserves which can only cover up a shortage temporarily anyway).

This means that demand must be constrained so that it does not exceed production. I see two possibiliteis for this, first would be rationing and centrally set fixed prices and secondly allowing price hikes to create sufficient demand destruction to bring demand down to exactly the production levels.
As far as rationing and central control this must surely be a doomed approach. Rationing would mean centrally controlled and planned consumption but that would only work if one has full control of all production as well. As long as producers have the option to sell their goods elsewhere, at better prices, rationing can never work.
It is not realistic that the western world would gain full control of all global production facilities and thus it would be pointless to attempt rationing (or conversing).
"Mr consumer, interesting theory about 'price' and rationing however the guy over there offers a better price for my goods so you can ration all of the 0 barrels I will sell you."

That leaves demand destruction as the only possibility to curb demand and this would require continous price increases to counter any deman increase to drag demand down to the maximal possible consumption levels (= max production).

Demand destruction occurs at all levels. Even if oil were priced at 10$/bbl there would still be demand destruction occuring   since demand would still be lower than if the price was 0.
Your article is the first one I have seen that tries to quantify demand destruction as a function of price and is therefore very interesting.

As far as demand will increase over the years and considering there are many datapoints that suggest we are at peak or near peak it appears demand destruction is the only way forward. Unfortunately this will lead to higher and higher prices to compensate for (and price out of the market) sufficient numbers of consumers so that equivilibrium is reached (consumption=production).

I would think that this together with the state of the dollar currency as very serious for the world economy.
Maybe the petrodollar is now a curse for the us now that production has/will peake? and no spare capacity is to be found and brought online easily.

Someone commented here or in another thread that why would he care, oil is priced in dollars and that is the currency he uses?
I think that is very wrong and dangerous thinking since
the us "only consumes ~25% of the production of oil.
However 74% of the consumers are not using dollar   and neither do they price oil in $.
Myself I dont get my salary in dolllars, neither do I use it to pay for goods or gas at the station. I pay using some other currency that is later converted to dollars and then into oil.
Well, really, i dont even pay really pay using some other currency (which is just a representation of the worth of money)   I pay what I in my local currency feel I can afford and what I think is cheap/expensive  relative to my purchasing power.
That oil is priced in dollars is completely irrelevant to me. What matters is how affordable oil is to me.

Assume the us dollar is devalueted 10%. This would mean that my money would suddenly get 10% more dollars and thus oil for my money. The amount of demand destruction that is created by me would then be reduced by the same amount since the price to me would become discounted  and I would start caring much less about the price. I.e. my demand destruction has decreased.
However, someone in the US would not experience this demand destruction since his money still buys the same amount of oil.

If the only thing that keeps demand down and equal to the production levels is demand destruction,  then if my demand destruction has decreased it would mean that someone elses demand destruction would increase.

It therefore seems very logical that IF the dollar is devalueated, then the price of oil in dollars would increase correspondingly so that a new demand destruction euqvilibrium is reached.
I.e. gas oil proces go up by approximately the same amount as the dollar fell and most people (75%) would find equivilibium at a slightly betteraffordability (relatively lower prices) while people in the us economy would experience an increase in cost of oil.

What i mean is that it is irrelevant that oil is traded in dollar.  It does not at all mean that oil price affordability is immune to currency rate changes.
Affordability and consumption will be shifted from the us towards stronger currencies.
(what do i care what the price of oil is in dollars as long as my cost of gasoline remains at 2% of my disposable income?)

Some economists propagate for china to revalue their currency by up to 40%. Are they really sure they want this? Do the western economy really need hundreds of milions of new gasoline consumers right now, supplies being tight and all? This would increase affordability of gasoline significantly among the new chineese middle class.
What we now is more demand destruction globally, not to make it more affordable to a huge new market.

As far as what peak oil will result it?
I belive ever increasing price  the end of the western(us) middle class in those regions that can not adapt to 10$/gallon or more. However we wont go back to the stone age
nor will we have a total collapse. A recession or depression , riche people getting richer, poor people getting poorer and most of the middle class dissapearing.

But would expensive oil be a society changing event in all of the world?
Cheap gasolin is mainly a us (and australian) phenomenon in the western world.
Most european countries (and the one i am from originally) have had gasoline prices near or over 1.5$ per litre since ages.
That is over 6$ per gallon. Japan is the same.
And those societies have adapted and even do flourish. But you dont see many SUVs on the roads though.
These countries have adapted to very expensive gasoline and
oil over the last 30 years and are much less sensitive to the oil price. Guys, even if the price goes to 6$ per gallon, society will still go on,   you will have to adapt a bit but it is doable.

Maybe in the future, europeans will thank their politicians for the often complained about high gasoline taxes since it might have made their transition to a less-oil world easier?