Oil prices are soaring for three key reasons: the decline in the dollar, increase in demand from China, India and other countries, and finally decrease in supply due to underinvestment in oil fields and decrease in oil production.

The decrease in oil production from existing fields is primarily due to passing peak oil. As oil is pumped out of the ground pressure is slowly released. That release in pressure has no impact for some time, but eventually it means production will peak and start to slow down. Once an oil field hits peak oil, then production will constantly slow down over time.

There are ways to increase production by injecting water, steam, carbon dioxide or some other material into an oil well, but these methods only delay the inevitable slowdown in production.

Normally only 30% of the oil in a reservoir can be extracted, but various injection methods can increase that percentage (recovery factor) and maintain the production rate of a reservoir over a longer period of time.

From the article:

Prices are soaring, in part, because oil is denominated in U.S. dollars and the dollar declines, thanks to Washington’s overspending on wars, trade, subsidies and government budgets. Investors have also abandoned credit markets, since the meltdown due to subprime scandals in August, and put their money into solid, real assets instead.

But the biggest reason prices have been soaring is that investors are now understanding the future supply and demand reality.

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