Are we running out of oil? No. There is plenty of oil left. We are just running out of money to buy it.

What we have is a supply and demand imbalance aggravated by bad policy choices.

On the supply side, oil has been getting gradually harder to find and to get out of the ground. The equipment needed to drill in deep water (where many new fields are) is extremely expensive and in short supply, as are engineers, drill crews and the needed materials. Projects are challenging, demand large investments and take several years before the first barrel of oil goes to market. It takes effort, time and money to expand supply.

On the other hand demand has been accelerating, due primarily to a phenomenon called globalization. The theory behind globalization is that all constraints on markets (such as customs duties, subsidies, special taxes and so on) are removed and a single global market created, economic activities will migrate to the areas where they can be performed at the lowest cost. The market will then provide for the highest possible production of goods at the lowest possible price, generating economic efficiency and general prosperity.

This theory is particularly attractive to multi-national corporations, since it supports the outsourcing of production abroad, thus escaping from all the costs of producing in the US or Europe - not only high wages, but Social Security and Medicare contributions, work safety rules, environmental protection obligations, medical insurance and so on.

 Over the last two decades a substantial portion of US ( and European and Japanese manufacturing) has thus been exported, resulting in a lowering of production costs and a parallel rise in profit margins (as the theory predicted). This trend has, however, also resulted in a huge amount of money being sent abroad, by the US and other developed nations, in the form of trade deficits. This inflow of funds has allowed the receiving countries, such as China and India, to reach extraordinary rates of investment and growth. All was thus for the best, except for the energy supply.

Globalization has dramatically increased energy demand in a number of overlapping ways: first simply to fuel the extraordinary economic growth in the new exporting countries; second, because industry in, for example, China, was not as energy efficient as in the US, so that the amount of oil or other fuel needed to produce a given quantity of goods was higher even though the overall cost of the goods was lower (at least initially); third, because globalization vastly increases the shipping of goods and materials across the globe, and transportation runs on oil; and fourth, because the new export-based wealth raised living standards and thereby further increased energy consumption.

For roughly a decade now oil demand has been increasing much faster than supply, and price has moved up accordingly. Twelve months ago it was $72/barrel. As I write it is $145. For this summer $170/barrel has been predicted, and some investors on Wall Street are betting on $200 and more.

There have been attempts to blame various parties for this situation : the Saudis for "not pumping enough"; "Big Oil" for making obscene profits; various speculators for hoarding oil futures so as to raise the price and make a quick killing; "environmentalists" for not allowing drilling on US coasts or in the Arctic; and so on. All of the above may contribute a bit to the price rise, but none can fully explain it. The core issue remains supply vs. demand. As of now, we are locked into the situation outlined above, and the price will keep rising until something gives.

There are solutions, but they will take a national consensus and a good deal of political will. We will review the options in coming articles.

 For more analysis - http://voyons-potsdemiel.blogspot.com/