Ideal oil price $60 to $80 US per barrel?

What is the ideal oil price? A review of recent economic history yields the observation that when petroleum sells above about $80 a barrel (in inflation-adjusted terms) economies begins to stall. Oil industry wags have begun to speak of a “Goldilocks” price range of $60 to $80 a barrel (not too high, not too low, just right!) as the prerequisite for economic recovery. If prices are higher, the economy sputters, reducing oil demand and subsequently seriously undermining prices; if they drift lower, not enough investment will go toward exploration and production, so that oil shortages and price spikes will become inevitable a few years hence.

To justify the needed level of effort, the oil industry requires prices in excess of $60 per barrel, otherwise, the new projects will turn out to be money-losers. Some analysts believe the magic break-even number is closer to $70. In any case, the figure is much higher than was required only a few years ago, and still higher oil prices may be necessary to make exploration and production profitable for future projects, with oil prices perhaps close to $80 a barrel.

If the market can keep prices reliably within that charmed $60 to $80 range, all will be well. Too bad that petroleum prices have grown extremely volatile in recent years. The industry needs oil prices that are both stable and near economy, killing levels in order to justify investments necessary to possibly replace depleting reserves and overcome declining production in existing oilfields.

Should this picture lead the viewer to come away with reassured thoughts of “No worries, happy motoring?” Or does this look more like a portrait of peak oil?

Several commentators including analysts with financial services company Raymond James Associates and Macquarie, the Australian-headquartered investment bank have concluded from recent petroleum statistics that global oil production peaked in 2008. Macquarie is saying that world production capacity is peaking this year, which is a nuanced way of saying the same thing, since currently production is constrained more by depressed demand than by immediate shortfalls in supply; in effect both organizations assert that the world will never see higher rates of extraction than the so-far record level of July 2008.

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