The demand half of supply & demand is itself is made up of two components; desire for the item plus the ability to pay. After a certain point – the point where supply can no longer meet demand – price is determined completely by the ability to pay.

The 52 week average price for Brent is about US$114 - $10 higher in real terms than it has ever been in the history of oil and that is even with throwing anything that will burn into the pot. Obviously supply is constrained by something other than price and demand is constrained BY price.

Here is a chart I scribbled out illustrating the theory there is an increasing floor to the price of oil but that there is also a ceiling to the price that the economy can afford to pay:




The faint orange line illustrates the idea that the economy will become weaker over time and instead of becoming inured to high prices it will actually be less able to afford the higher price and shrink to meet supply.



http://ourfiniteworld.com/2012/07/13/plan-for-lower-growth-in-real-gdp-going-forward/


Considering that the world economy is flatlining at best, I'd say peak oil is moving along just as theorized.

I think rather than postulating the drop in oil prices at the end of 2008 was the result of hitting some sort of demand ceiling, the more likely explanation is that the global financial collapse and subsequent economic recession cause the drop in demand. However, as I said in my post the real problem is viewing oil prices in simplistic terms. Much goes into the price of oil: overall economic health, political stability in key oil producing states, changing supplies as certain sources become profitable after price reaches a certain point, improving technology, etc.

Basically, it went this way:

1. If you work 40 hours a week for the 52 weeks in a year, that is 2080 hours.

2. If you are earning minimum wage, that is $7.15 per hour or $14,872 per year (2080 hours times 7.15 per hour).

3. It cost about $2 for breakfast, $3 for lunch and $5 for dinner, if you are careful in your budget and do NOT eat out. i.e. $10 a day per person or $3650 per year. $14,872 less $3650 leaves only $11,222.

4. If someone is in Public Housing, 30% of their income must go for rent. Most low income people have to pay even more. 30% of $14,872 is $4461.60 or $371.80 per month.

5. Most local areas have a 1-2% wage tax. The State often has a similar tax even for people in Minimum Wage. Thus roughly 10% of even low income people go to taxes. 10% of $14,872 is $1,487.20.

6. $11,222 (The amount left after FOOD), less $4461.60 less $1487.20 is $5273.20.

7. Car Insurance, car maintenance, etc runs about another $1000 a year. Remember this includes changing the oil, buying new tires, any other maintenance the car needs (And I am ignoring the fact that if the car for a car to be reliable it's cost is at least $2000). This ignore any major repairs. That leaves $4273.20.

7. Low income people tend to buy larger cars for that is what is on the market (Compact cars are shipped to Southern Europe or the Far East, thus leaving mid-size and larger cars for the US market). Thus for this reason the average car driven by a low income person gets less then 20 mpg.

8. Insurance companies say the "Normal" driver, drives 12,000 miles per year, divided by a car that get 20 mpg that comes to 600 gallons per years (Most drivers do about 15,000, but you have enough low mileage drivers to bring the "Average" down to 12,000 miles).

9. $4267.20 divided by 600 gallons used each year equals just under $7.12 per gallon.

Thus a minimum wage employee can NOT afford to eat, keep his home, maintain his car AND pay for the gasoline to get to work if the cost of Gasoline exceeds $7.12 per gallon.

Now, the above calculation ignores several factors, child support, clothing, phone service (an implied requirement of most jobs today) in addition to any food stamps or other benefit the minimum wage worker would be entitled to (and as a person who deals with low income people, a full time minimum wage worker is NOT entitled to much assistance, even food stamps tend to end at a level BELOW minimum wage UNLESS you have other members in the household i.e children or spouse who is NOT working. Please note the above number for Breakfast, Lunch and Dinner was for 2008, all three have gone up since 2008.

Now, look at $7.12 a gallon. In 2008, minimum wage was $5.25 a hour, as the price of gasoline reached $4, you saw a drop in gasoline usage. At 5.25 the above number were lower:

5,25x2080= $10920.
Food was about the same: $3650
Taxes were lower: $1092
Public Housing: $3276
Car cost were about the same: $ 1000
Which left only $ 1902 for all other costs, including gasoline. That comes to $3,17 per gallon.

Once you look into the above figures you quickly see prices above $4 a gallon means drastic drops in the use of gasoline. The increase in Minimum wage helped a little, but it means a large segment of the American population, who can afford a $2000 clunker can NOT afford the gasoline for that Clunker. This appears to confirm the results in the rest of the world, people stop buying gasoline as the price reaches about what they earn per hour.

Please note, the 2008 calculations used $5.25 per hour, but the same price for food as I used in the 2012 calculations ($10 a day is a good approximation and an easy number to work around, just like 10% tax rate is a good approximation,. Most states do NOT do what my home state of Pennsylvania does, requires a flat income tax rate for all incomes. Bus fares have gone up, while bus service has gone down. It is thus easy to see why the US is using 12% less gasoline then it did in 2007 and why. People can NOT afford it.

In many ways, the drop in demand in the US has compensated for the drop in production (Saudi Arabian Oil production has gone up, but Russia's has gone down, as has Norway's England's, the North Slope of Alaska and most of the rest of the world production has gone down). We seem to be is a very equidistant situation. The drop in demand due to the high prices along with the increase in production in enough fields to off set the decrease in production in most of the world.

How long will this last? I suspect it is about to break, thus the slow increase in prices. The slow increase in prices of recent months reminds me of the time just before the 1973 oil embargo. I remember my father complaining that the price of gasoline was to high at 35 cents a gallon. I was to young to realize it, but in the mid to late 1960s gasoline prices averaged 25 cents a gallon thus he had a point. Then the oil embargo hit and prices went to 70-80 cents a gallon almost overnight.

When it breaks, I expect a huge increase in the price of oil, but till then a slow steady increase which may last for years. What will lead to the huge increase is some oil producing country undo a revolution or other internal crisis. Mexico ripe for it, as is Saudi Arabia and most of the Persian Gulf Countries. This may be offset by a revolution in a oil importing country, such as China or Indonesia (Indonesia use to be an oil exporting country, but is now a net importer). China and Indonesia (along with Iran) are more stable then Saudi Arabia and the rest of the Persian Gulf nations (Though a US or Israeli attack on Iran is a different ballgame). Venezuela is stable as long as Chavez is alive, but if he should die it is a big question mark.

Thus, unless someone does something stupid (or the present riots in the Moslem World leads to a revolution in a OPEC member) I expect prices to slowly climb. Price will jump, if like in 1973, someone does something unexpected such as OPEC embargoing oil (and that embargo affecting the US) or the Iranian revolution that kicked out the Shah.

I remember reading about someone who comment on Hubbard's prediction of US oil peak and then decline and pointing out NO ONE mentioned Hubbard during the years prior to or after the 1973 Oil Embargo. He had been dismissed as a quack, given it did not hit in the exact year he predicted (he had been off a whole year) but a few years later when it was clear US oil production had declined, as Hubbard had predicted, but not in the exact year he had predicted, people started to mention Hubbard and his theory. The difference were within the error rates expected for such prediction and thus could no longer be ignored. The same today, the exact year of peak oil may not be determined until years after the event, but the rough estimates for peak oil are all still within the error rates of those predictions. Something is hitting the oil market and it appears to be Peak Oil via a slow increase in the price of oil.

The ave. production level from 2005 to the present is still 73.5 mb/d, which confirms the IEA argument that peak oil took place in 2005. The production cost is now around $100 a barrel. Finally, what should be noted is production rate, not reserves, especially if demand is higher than production rate. With that, the effects of peak oil take place even before production drops.