Explaining the price of oil 1971–2014 : the need to use reliable data on oil discovery and to account for ‘mid-point’ peak

Abstract

This paper explains, in broad terms, the price of oil from 1971 to 2014 and focuses on the large price increases after 1973 and 2004. The explanation for these increases includes the quantity of conventional oil (i.e. oil in fields) discovered, combined with the decline in production of this oil that occurs typically once ‘mid-point’ is passed. Many past explanations of oil price have overlooked these two constraints, and hence provided insufficient explanations of oil price. Reliable data on conventional oil discovery cannot come from public-domain proved (‘1P’) oil reserves, as such data are very misleading. Instead oil industry backdated proved-plus-probable (‘2P’) data must be used. It is recognised that accessing 2P data can be expensive, or difficult. The ‘mid-point’ peak of conventional oil production results from a region's field-size distribution, its fall-off in oil discovery, and the physics of field decline. In terms of the future price of oil, estimates of the global recoverable resource of conventional oil show that the oil price will remain high on average, unless dramatic changes occur in the volume of production and cost of non-conventional oils, or if the overall demand for oil were to decline. The paper concludes with policy recommendations.