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July 31, 2005

The Coming Oil Glut and the "Law of Long Lead Times"

We recently pointed to a study by Cambridge Energy Research Associates (CERA) on the coming supply glut of oil, due to a 20% addition to worldwide capacity over five years.

Daniel Yergin, Chairman of CERA and author of The Prize: The Epic Quest for Oil, Money and Power, adds an exclamation point to this study with further perspective in a Washington Post commentary:

While questions can be raised about [capacity expansion scenarios for] specific countries, this forecast is not speculative. It is based on what is already unfolding. The oil industry is governed by a "law of long lead times." Much of the new capacity that will become available between now and 2010 is under development. Many of the projects that embody this new capacity were approved in the 2001-03 period, based on price expectations much lower than current prices.

Yergin goes on to point out, however, that world demand for oil could rise 50% over the next 25 years. The question then, is whether we will take advantage of this moderation in energy prices over the coming few years to develop more efficient long-term sources of energy and conservation technologies.

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