Posted: January 2, 2008

If oil demand in 2008 rises 1.5% to 2% above 2007’s level, global economic growth will stall unless oil production quickly climbs into record territory. That’s the dire outlook from Matthew R. Simmons, chairman of the Houston-based energy investment banking firm Simmons & Company International.

Simmons is the financial world’s most respected proponent of the school of thought that the world has hit an oil production “peak.” Until this year, peak oil advocates were generally dismissed by governments and in the media in favor of private and government analysts more in line with the oil industry’s own more optimistic assessments. But recent articles in the Wall Street Journal and elsewhere suggest the tide is turning. Indeed, Simmons’s 2008 prediction is disturbingly similar to one just issued by the U.S. government’s own energy forecaster.

The Energy Information Administration’s (EIA) most recent short-term forecast concluded that global oil markets will remain tight. EIA said world oil demand will grow much faster than non-OPEC supply, leaving OPEC to make up the difference. EIA indicated this may not happen because, contrary to Western experts, the cartel believes the world is well-supplied, a position that may or may not be camouflage for the cartel’s inability to further significantly raise production.

Simmons told EnergyTechStocks.com that if demand rises 1.5% to 2%, unless crude production quickly rebounds to its peak set in May 2005 and then keeps growing in step with demand, the world will draw down stocks to the point “where shortages stop further growth.” (Inventory levels in parts of the world are already low.)

At this point, nobody knows for sure how much demand will grow in 2008, in large part because it’s impossible to know how U.S. drivers will respond when, as EIA predicts, the average price of a gallon of regular tops $3.40 next spring. With a $3.40 or higher national average, several big population states like New York and California likely will top $4 a gallon. The question will be whether 2008’s record high gas prices finally cause Americans to drive less, which several experts don’t expect will happen because of Americans’ auto dependency.

Tomorrow, January 3, Part 2 of 2008 Oil Outlook – Marshall Adkins: U.S. GDP Growth Forecasts are Unattainable