Murli Deora, minister of petroleum, set “unreasonable expectations” of price revisions of crude-oil distillates by saying he would consider a revision when crude hits $67 and subsequently $61. He must be regretting his words. The stubborn, unexpected rise of the dollar and volatile oil prices in the international market have led him to rethink his earlier commitment.

World crude oil output has been essentially stagnant at about 86 million barrels per day (MBD) since 2005. The price meanwhile had almost tripled from around $50 to $147 and is now back at about $65 after flirting with the low $60s due to the economic slowdown and the consequent fall in oil demand. I had said in an earlier column that what we need is a floor for oil prices. This was said precisely in expectation of such volatility.

That oil production will peak at some point is a foregone conclusion. The only question is at what level it will do so. Data indicators of extraction levels and prices coupled with pleas for increasing extraction indicate that we have very likely peaked. A peak in oil extraction is all the more imminent given the recent Financial Times story previewing a critical finding of an International Energy Agency study: “Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent.” It is worth noting that extra investment may delay the peak, that too insignificantly.

That price volatility accompanies the attainment of peak production had been forecasted in 2003 by Ken Deffeyes in his book, Beyond Oil: “Queuing theory predicts that queues behave in a noisy and chaotic manner when demands approach the system capacity... Instead of energy prices rising to a new stable level, wild price oscillations will result from short-term changes in demand. There will be a tendency, the first time that prices go down, to announce that the crisis is over and oil and gas are now cheap and abundant again.”

... contd.