I’m just as perplexed as everyone else about the huge run-up in oil and gasoline prices over the past two or three years. Some say it’s the Chinese, some say it’s the speculators, some say it’s politics that’s to blame. To get some perspective on the issue, I decided to download some data from the federal EIA web site and make a chart that analyzes changes in world oil production, usage, and prices over the past quarter century (with reasonable projections for 2008 and 2009). My chart doesn’t show actual prices and barrels of oil produced and used. Instead, it plots the ratio of usage, production and price statistics for each year relative to the same statistic for the past year. So, if prices went up 10% over the previous year, the chart will show 1.1 for prices. If production went up 2% from the previous year, the chart will show 1.02 for production. If usage went down by 4%, it will show 0.96 for usage.

So here’s the chart; the price line is green (the color of money), the production line is blue, and the usage line is pinkish-purple.

What gets me about this chart is that over the past three years, nothing really extraordinary has happened (and is not expected to happen into 2009). In the 1970’s and 1980’s, the lines on the chart swing all over the place, reflecting the price shocks from the OPEC oil boycott of 1973 and the Iran hostage situation in 1979. But after 1984 or so, things seemed to settle down within a certain range of yearly change. And it’s hard to see any big changes from that trend, even over the past three years. The biggest movement, which you have to look really hard to see, is that yearly oil demand increases haven’t gone significantly below 1% since 1994. Between 1983 and 1997, yearly demand increased between 0% and 1% in five years. After ’97, it only went below 1% once. So yes, increasing oil demand in the developing world (India and China, mostly) is being felt. But it’s not any really huge change relative to the past. Demand increases are generally staying under 3%, as they have since 1977.

With that increase in demand, prices are rising more often than falling. In the same ’83 to ’97 period, average prices went down from one year to the next in nine instances. After that, average yearly price declines have only happened twice. Oil production, by contrast, seems to fluctuate between -1% and plus 4% per year, as it has since 1983.

What I take from this analysis is that we are severely pushing this planet’s ability to yield petroleum at a reasonable price. Supply does not seem to be keeping up with potential demand, so increased prices help manage demand by reducing it back to sustainable levels (in the short-run, anyway). The marginal costs of bring forth new sources of oil are thus seen to be going up, significantly. Unless we get really lucky and find an unanticipated cheap supply of oil or gas, or devise some technology that makes oil and gas recovery much cheaper, the days of easy energy are over. Speculators will make the pain a bit worse, and quick fixes like drilling for oil along the US coastal shelves might provide a temporary palliative. But until America and the rest of the world learns to wean itself off of petroleum, which could take many decades, our economies and our standards of living are in for some ups and downs; and the downs may outnumber the ups.