Saturday, May 08, 2010

why peak oil will never lead to $500/bbl crude oil

  • Although there’s more than 100 years’ supply of crude oil left in the ground, the resources that are “cheap and easy” to extract have for the most part already been discovered.
  • By 2012 the decline of production output from conventional sources coupled with much higher extraction cost of unconventional sources will lead to peak cheap oil, a phenomenon that will put extreme upward pressure on oil prices.
  • To a limited extent, a strong case exists for speculation on a moderate increase in petroleum prices.
  • Those who anticipate extraordinarily high prices (upwards of $300/bbl) have failed to consider what George Soros calls reflexivity. The global economy simply cannot afford such prices, and the rules will be changed before they are reached.
  • The future is likely to bring price controls, government intervention in the petroleum supply chain, and nationalization of oil resources.
  • The oil industry will face many unanticipated challenges during this period, capping the price appreciation potential of both commodity and equity plays in the oil industry.
  • Wise investors will focus on the initial price run-up expected to occur before large-scale government intervention ensues.
Background
If you’re an investor and you haven’t yet learned about Peak Oil, you need to drop what you’re doing and go find out all about it. The implications of Peak Oil are far wider reaching than the energy sector. Peak Oil is a macroeconomic story that will dramatically affect virtually all investments in the coming decade. This article is intended for those already familiar with the Peak Oil prognosis, and focuses on why I think a lot of investors are making faulty predictions about what Peak Oil will mean for future oil prices. If you’re not already up to speed on the background material, here are some resources to start with:
  • The very best basic introduction to the concepts of Peak Oil that I know of is this free video from Dr. Chris Martenson’s Crash Course.
  • From there, read Eric Janszen’s excellent articles on the subject, paying particular attention to the distinction Janszen draws between Peak Oil and Peak Cheap Oil. Some of Janszen’s articles are free while others require a subscription to his web site. Start with this free article to get a taste of Janszen’s perspective.
I find it very interesting that Peak Oil has recently begun to get a lot more mainstream attention. Previously, despite overwhelming evidence, Peak Oil was considered a “fringe idea” and not taken particularly seriously by the mainstream investment community. Suddenly the tide seems to have changed.