Kevin Drum has some interesting thoughts on oil. The thesis

The basic story is simple: As long as there’s spare oil-production capacity, increasing demand caused by economic growth produces only a steady, manageable increase in oil prices. But oil production is now close to its maximum and can’t be easily or quickly expanded. When the global economy grows enough that demand starts to bump up against this ceiling, oil prices don’t rise slowly and steadily; rather, they spike suddenly, causing a recession, which in turn reduces oil demand and drives down prices. When the economy recovers, the cycle starts all over. Because of this dynamic, the production ceiling for oil produces a corresponding ceiling for world economic growth.

Oil and the macro-economy is definitely on my to-do list. I have strong priors that money, credit and banking are where its at, but the evidence on oil is intriguing.

My neophyte impression, however, is that $135 a barrel oil doesn’t make sense. As I understand it, the tar sands, shale oil and other non-conventional sources can be profitably tapped at constant price of $80 a barrel.

This implies that an oil prices that stays where it is today will see an enormous expansion in those resources. And, so it seems that is beginning to happen. Via Bloomberg:

North America will become the fastest growing oil-producing region outside OPEC during the next five years, with output estimated to jump 11 percent, according to the International Energy Agency.

The region is likely to see output climb 1.5 million barrels a day to 15.6 million by 2016 mostly because of increased output from Canadian oil sands and U.S. onshore shale formations, the Paris-based adviser to oil-consuming nations said today in its Medium-Term Oil and Gas Markets report.

Now that’s still well short of the additional we’d need if we stretch Kevin’s counter-factual out to 2016. However, I am told by industry folks that the IEA is well behind the curve and that sustained prices could just in a much bigger jump in production.

Moreover, that’s just North American production. Non-conventional production in South America and Russia are said to have enormous potential as well.

When you combine those factors together I see how we might get short-run spikes but consistent upward pressure from emerging economies should open up new supplies and keep oil prices in the sub $100 range.