Friday, September 01, 2006

Peak Oil- Ready for $200/bbl?

I'm not a scientist, nor a petroleum engineer. Like most of you I read what other experts say about complicated issues and try to make sense of it. Also, like most of you, I try to think through the consequences.

I have no clue whether or not oil is going to $200/bbl anytime soon... but I do know we'd discover the straw that broke the stock market's back long before we ever get there (in other words, whatever shocking price arrives would be academic at some point).

Yesterday my wheels started turning when I stumbled upon this attention grabbing headline over on Bloomberg: Peak Oil Forecasters Win Converts on Wall Street to $200 Crude

Before you blow a gasket, let me point out, despite the headline, the author actually balances out the debate between the two camps. There's something for everyone here: "Peaksters", Cynics, or even Agnostics like me.

But really, what interests me is the psychology of the issue.

...the peaksters are drowning out everyone else, Cranberg says. ``You can't turn around without seeing or hearing these ideas,'' he says. ``I think they are gaining.''
You don't have to be a geologist to understand why. The price of
crude has tripled since 2000. In the U.S., $3-a-gallon gasoline has sapped consumers' confidence. Nearly half of Americans believe the economy is doing poorly...``If oil was still at $20, no one would be talking about peak oil,'' says Manouchehr Takin, senior petroleum upstream analyst at the Centre for Global Energy Studies, a London-based consulting firm.

The first time I heard about peak oil was a looooong time ago, during a debate about IF, or when, US production had started to decline. At that time there were lots of folks who questioned the accuracy of such a claim. Frankly, it sounded unpatriotic.

By the late 1990's, when the price of oil was in the low teens- despite the then obvious decline in US Production- the concept of "Peak Oil" was a joke. Only a few fringe types and pointy headed professors bothered talking about it. And with wholesale gas around a dollar per gallon, the public- and thus, politicians- could not have cared less. Nobody knew or cared where it came from, nor about rising Chinese consumption, blah, blah, blah.

Next, please.

Since then everybody has been wrong about oil. Wall Street analysts, industry experts, government experts. Oil prices have gone higher than anybody imagined.

Take a long look at that chart again. Rising oil prices are no longer described as transient while keeping a straight face. Instead, I see the same folks blaming Hedge Funds, or Iran, or [insert your own ideas]. And those market strategists that claim $25/bbl of the price is Hedge Funds/Iran- why would anybody listen to them? They were still using $28 oil targets when oil was trading at $60.

Having said that, there's no doubt, in the short and intermediate term, oil prices are no different than the way inflation expectations work their way through an economy.

Therefore, if a majority of Americans wake up one morning and decide we have a Peak Oil crisis on our hands, then it will become a self-fulfilling prophecy.

How likely is that? No idea. But I sense American public opinion has been following the rest of the world on a number of big issues such as this one.

Global Warming comes to mind.

How the heck did we get on Global Warming?!

Bear with me here.

Up until recently the majority of Americans sniffed at the idea of global warming, let alone the notion it is becoming a crisis. Yet after one hell of a hot summer, global warming has become accepted by a wide margin of Americans. More importantly, a majority now say we need to do something about it.

And just 6 months ago Al Gore was material for late night comedians every time there was a snowstorm somewhere in the Northern Hemisphere.

Meanwhile, the rest of the world is now shaking their head thinking "it's about time you people woke up!" They have believed deeply that global warming is an end-of-the-world-as-we-know-it crisis for years.

And they are way ahead of Americans on Peak Oil, too.

The question is whether Peak Oil will suddenly get traction in the US the way we've seen sentiment shift massively on Global Warming in 2006.

If so, oil prices in 2007 might be an even bigger surprise.

Truth is, a lot of really smart people will be arguing about all this- the facts, that is- for years. But with the economy already slowing, we need to pay close attention to the psychology of big stories such as this, because the market will have already sniffed this stuff out when the competing experts are still arguing over the shape of the table for their next conference.

Finally, what do I think about Peak Oil/oil prices? Do I believe we'll see $200/bbl for oil? The contrarian in me sees that headline and smiles at the thought of oil plummeting from here. But then again, a year ago I would not have guessed anybody in this country would ever believe global warming. Frankly, it doesn't matter what I think- I'm watching the psychology on this one instead.


Anonymous RW said...

Every once in awhile, Jeff Matthews who was an oil analyst before he became a hedgie, comments on his blog concerning the current trajectory of oil as he sees it (latest at ), the upshot being don't expect significantly lower prices in petroleum products even if the price of crude does drop.

I'm inclined to doubt crude will reach $200/bbl before other substitution processes kick in but there is this fly in the ointment that I've come to think of as the problem of latency: Successful substitution of something as economically pivotal as petroleum (and its related products) as well as related technologies and infrastructure takes a lot of time and a lot of money.

For example, most of the talk about switching to ethanol fails to take into account a whole host of time and money intensive issues. Never mind that it currently costs more to produce a unit of ethanol using corn or other temperate zone crops than you get back out of it in energy making the whole idea impractical (barring a very different conversion technology or relocation to a tropical country like Brazil). And never mind that concentrations of ethanol greater than 10-15% require changes in engine technology and/or construction. You can not transport ethanol using the same technologies and materials used for the transport of petroleum byproducts -- a whole new transport infrastructure would need to be built.

Similar problems obtain with coal gasification, alternate energy sources, electrification of automobiles, etc so if psychology is indeed changing, and I agree it is, the latency problem yet remains which makes me think that even if everyone suddenly agreed on a specific technology switch within the next year you'd still probably be looking at a decade before that switch hits critical mass.

So, could oil reach $200/bbl before then? Well, yeah, in all honesty it could.

12:30 PM  

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