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By Robert Rapier on Nov 12, 2012 with 6 responses

Hofmeister: Surging Demand and Flat Production Equals High Oil Prices

Can Oil Supplies Grow Fast Enough to Keep Prices in Check?

I, along with my editor Sam Avro, recently conducted a broad-ranging interview with John Hofmeister, former President of Shell Oil and currently the head of Citizens for Affordable Energy, a non-profit group whose aim is to promote sound U.S. energy security solutions for the nation. In the first part of this interview Mr. Hofmeister spoke of A Difficult Decade Ahead For Oil Prices and Supplies. In the second, he set forth an Energy Plan for America. In the current installment, he discusses the events responsible for the explosion in the price of oil over the past decade.

Developing Demand and Depleting Supplies

I prefaced my question with my own view that the explosive growth in oil prices mostly boiled down to new demand outstripping new supplies, which resulted in loss of spare capacity. Some have suggested that the real culprit is a massive influx of financial players into the oil markets, so I was curious to get Mr. Hofmeister’s views on the factors behind the escalation in oil prices over the past decade.

In response, he cited that the main factors were ”constant growing global demand” and “flat production for the most part” over the past decade. (Read more: Petroleum Demand in Developing Countries)

He noted that several developing areas experienced strong production growth, while OPEC struggled to increase capacity:

“In 2005 China needed about 5 million barrels per day (bpd) of oil; in 2011 China needed 10 million bpd of oil; by 2015 China will probably need 15 million bpd of oil. And that kind of tripling of demand in China, augmented by significant additional increases in daily demand from the rest of the developing world, including India and the fact that OPEC has been largely flat in its production and its inability to create spare capacity for most of the last decade.”

For the rest of the world, he noted that oil production in most non-OPEC countries is in decline, with Russia and Brazil as two non-OPEC countries with the potential for increased production. (Read more: How Much Oil Does the World Produce?)

He stated that the fundamental problem is that the annual decline rate of existing fields is 4 to 5 million bpd, so each year we need 4 to 5 million new barrels per day of production just to stay even. Demand growth requires additional supplies on top of that, and if the supplies don’t come online to meet demand growth, higher prices are the inevitable result.

In a nutshell, Mr. Hofmeister stated that the reason for higher prices is simply that “We have not been able to keep up with demand growth and the decline rate simultaneously.”

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Mr. Hofmeister has been helping to shape content for the launch of Total Energy USA as a member of the Executive Committee. Total Energy USA is the groundbreaking conference and exposition that addresses the greatest uncertainty in the energy industry today — the cross-fertilization of energy sectors and technologies. More information about Total Energy USA, November 27-29 in Houston, Texas at www.TotalEnergyUSA.com

Link to Original Article: Hofmeister: Demand and Decline Equals High Oil Prices

By Robert Rapier

  1. By Brad on November 12, 2012 at 10:24 am

    “a non-profit group whose aim is to promote sound U.S. energy security solutions for the nation”  I believe they are non-profit but this dirtbag has millions invested in the oil industry.  These mental furballs are the reason it is so high.  When we have records imports in the US of 6+ million barrels each week it begs to show that this guy is very self-serving and has a bigger agenda for his non-profit group.  Crap…he was the former president of Shell…I guess he woud be the perfect person to trust information from…gack.

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  2. By Rob Ryan on November 12, 2012 at 11:42 am

    @brad

    Classic ad hominem. With what that he said do you disagree and with what facts do you support your position?

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  3. By BunnySlippers on November 13, 2012 at 3:19 pm

    Its the FED!!  The money supply has nearly tripled between the QEI, QEII, and QEIII, not to mention tremendous amounts of deficit spending.  More dollars chasing the same number of barrels causes inflation and it always hits commodities first.

    Yes, supply and demand are fairly tight, not overly so and the outlook isn’t for a major, near-term change in either.

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    • By John Cheatham on November 22, 2012 at 3:01 pm

      Please leave off the Fox News talking points. 

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  4. By Adam on November 13, 2012 at 3:26 pm

    Interesting interview but he seems bullish on demand growth worldwide. Although demand for oil will surely increase I do not think it’ll continue to grow at the rate it has over the last decade (I feel that it’ll grow but China, for example, will be growing slower then in the precedent decades).

    I don’t think we’re near peak demand (And I think  peak oil will hit before peak demand) but I’m becoming more skeptical of incredibly high oil prices by the end of this decade. I could imagine a 50% increase in price but not the 100% increase we saw over the last decade. I think that price increases will allow depletion rates to be offset for the near time (by using more challenging oil plays) by new plays coming online. Of course… I feel we will never get to 100 mpbd or anything of that like.

     

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  5. By mac on November 13, 2012 at 7:35 pm

    “Mac, I was just really responding to your question of whether the U.S. had ever produced 10 million bpd. We did, briefly. Will we ever get back to that level? No.”

    RR

    Thanks, I always though you had your head on your shoulders…

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