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The Resurrection of Peak Oil
It has been a long wait for “peak oilers,” whose passionate belief is that the world will run out of oil in coming years, sending prices through the roof.
This splinter religion came into being in 1956 when M. King Hubbert produced some simply supply/demand charts showing that US reserves of Texas tea would dry up by 1965-70, forcing a heavy reliance on imports with which we have become all too familiar. This was later expanded globally, implying that Western civilization would come to a grinding halt.
It all seemed very prescient, when in 1973 OPEC raised prices from $3/barrel to $12 in the wake of the Yom Kippur war, and the resulting boycott caused enormous lines at American gas stations. It happened again in 1979 with the fall of the Shah of Iran, taking crude from $12 to $40. Then Saudi overproduction kicked in big time, bring 20 years of falling prices, all the way down to $8. At the 1998 low, oil was selling for less than the barrel that contained it.
Then came China and the commodities boom, which suddenly sent the value of all things “hard” skyward. Virtually overnight, the Middle Kingdom became the world’s largest marginal consumer of not only oil, but all energy sources. By 2008, peak oilers had the second coming in sight, with prices soaring to $150/barrel.
Enter the Great Recession. The real damage this caused was not the temporary collapse of prices down to $28/barrel and the wiping out of many industry participants. It was the two year freeze on the financing of new exploration and development, a byproduct of the Wall Street crash. BP’s Gulf oil spill didn’t help matters either. These events have combined to create a bubble in the energy pipeline, the implications of which we may only just now be seeing.
Now the Middle East is blowing up. With populations exploding, per capita incomes plunging, and a religion that mires them in the 14th century, this sort of viral, grass roots revolution could have, and should have happened any time over the last 40 years. It took cell phones, social media, and the Internet to provide the spark. At first, the world didn’t care, as Egypt and Tunisia produce little oil, and are non-factors in the global economy.
Now it’s Libya’s turn, and it’s a different kettle of fish. Having dealt with the Libyan government myself since 1968—Muammar Khadafi overthrew the government just before I was about to cross the border —I can only say this couldn’t happen to a nicer guy. I missed the Pan Am flight he blew up over Lockerbie, Scotland by a week and lost a few friends. The sooner he is found hanging by his heels from a lamp post, the better.
The revolution there raises broader, far more concerning questions. If it can happen in Libya, why not in Saudi Arabia, where the government is still essentially tribal in nature and will not be winning any prizes for their human rights record anytime soon. Women are still not allowed to drive. Take their 12 million barrels/day off the market, even for a few days, and the geopolitical implications are large.
Which brings me back to peak oil. After a quiet, long term downsizing, the US now only imports 2 million barrels a day from the Middle East. Canada is now our largest foreign supplier, followed by Mexico and Venezuela. But oil is a globally traded commodity, and if you prick the supply line in one place we all have to pay. Remove Saudi Arabia from the picture, and the results could be catastrophic, for China first, but for ourselves as well.
Now it’s Libya’s turn, and it’s a different kettle of fish World oil production today is 82-83 million barrels/day. There is probably another 5 million barrels/day in reserve. By 2015, an additional 3 million barrels/ day in will come on stream that was financed prior to the Wall Street melt down. After that, new supplies become very problematic.
Even if the US can keep its own demand relatively flat through modest economic growth, conservation, new efficiencies, alternatives, and switching to natural gas, China promises to eat up all of this increase. That’s when the sushi hits the fan. I think oil could hit $300/barrel by 2020, or $225 in today’s prices. If you are wondering why I have become so cautious about investing lately, this is a major reason why.
Which leads us all to the bigger question of how do we make a buck out of all of this? Brent crude, which trades in Europe, is already at $104.40/barrel, a $12/barrel premium to our own West Texas intermediate. Prices here have stayed low because of a shortage of storage facilities. My buddies in the field also tell me there is some elaborate conspiracy to keep West Texas artificially low, because the prices for Middle Eastern imports are priced off of that highly manipulated benchmark. It is far more likely that West Texas trades up to Brent than the other way around.
I missed the window to get in last week at $85/barrel. But if you believe it’s going substantially higher, it is not too late to get involved. For a start, do not buy the oil ETF (USO). The tracking error caused by the contango will kill you, assuring that you will take all of the risk but get few of the benefits.
Individual oil major stocks that I have been recommending, like ExxonMobil (XOM), BP (BP), and ConocoPhillips (COP) are great vehicles. A simple alternative is to pick up the double long oil majors ETF (DIG). These guys have massive supplies in the pipeline that are about to be revalued by higher prices. So are independents like Occidental Petroleum (OXY). You can throw oil service companies into the mix as well through the ETF (OIH). Higher oil prices almost make alternative energy producers like First Solar (FSLR) much more profitable.
As (OXY) founder, Dr. Armand Hammer, told me when I was a kid, “Keep your eye on oil, because everything stems from that.” Some 40 years later, and I think the old man is still right.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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I can't tell if you're a paid troll or a socially inept teenager, but either way, your claim has no basis in reality.
No one there advocates mass killing of people. Keep to the facts, it just makes things easier. I won't deny that there are some doomers there, no different really from some of the characters that inhabit the Hedge.
And if you think I am a doomer, you have not been reading very closely.
Last year the IEA announced that peak 'easy' oil had been realized in 2006.
http://makewealthhistory.org/2010/11/11/iea-peak-oil-happened-in-2006/
Peak Oil must be placed in a relevant time horizon.
If our banking and political masters keep growing debt then the Chickle Littles will have to think about Peak Oil DEMAND.
As a growing portion of incomes has to carry the interest on exponentially growing debt, then oil, like everything else, is going to see demand flatten or fall.
For now, Politics and Big Oil rule the day.
you forgot that point about everything being made out of and depending on oil. It is not a typical commodity. As far as the economy is concerned, it's less chicken little, more chicken and egg issue
not to mention the 10 calories of fossil fuel energy for every calorie of food those chickens eat
I posted some facts above... the ball is in your court. Put up or shut up.
I've been following the peak oil story since 2003. Critics claim that to peak oilers, peak oil is always 5 years away. When I started paying attention 2008 was the year it was supposed to happen, but every year it gets revised to being 5 years away, just as the critics said. Now I believe that PO will one day happen, and one year it will be 5 years away, but I am very skeptical of any prediction that puts it 5 years out.
The problem is simple: quite a lot of peak oilers are biased. They want something to be done about peak oil, a mitigation of its effects (reversely, you have people who want peak oil to happen as brutally as possible as this will give them a very strong position of power)
The main way to communicate by peak oilers seems the illusion of an emergency.
Peak oil will happen in five years, people will live through the consequences therefore must act by now.
Wrong of course as peak oil and its potential consequences were known since before the oil introduction because of coal experience.
The West entered the age of oil, knowing of its drawbacks and had 100 years to curb the trend in one way or another. It is pretty clear that the race to deplete oil the fastest possible was the chosen path.
Kicking the can or something more vicious actually. Peak oil is nothing very different from the debt issue, people knowing from the start the attached strings coming with it but kicking the can was the priviledged course.
So correct. We do have a serious peak coal problem. And the prospects are grim. The current predictions say that right now peak coal is no more than 100 or 200 years away.
Nope. Peak coal grew irrelevant the day oil became the alpha energy.
Coal is a secondary energy. It does not matter as its extraction is sponsored by oil. We could be past peak coal it would not matter.
Not even VAGUELY correct, idiot.
Use cases based upon zero consumption growth put TOTAL RESERVES EXHAUSTION at "100 years."
They say NOTHING about when the RATE of production will peak.
If you do not understand the basic concepts under discussion, kindly STFU
And every time we get close to peak coal the reserves expand.
As to oil we passed the peak in the late 1800s. No more easy 100 ft wells. We are well past the peak of 100 ft oil. And technology didn't save us.
/sarc
Data please... a link would suffice. Also please take into account the evolution of energy density of proven reserves.
You are playing with the big boys here, not hoi polloi at the Yahoo boards.
Peak Coal. If nations try creating liquid fuels from coal, they will deplete resources even more quickly.
http://europe.theoildrum.com/node/2396
http://www.energybulletin.net/node/29919
http://news.nationalgeographic.com/news/2010/09/100908-energy-peak-coal/
If you investigate the history you'll find that "peak oil" has been 5 years away for over 50 years. It is a convenient lie propagated by powerful interests.
Nothing is quite so amusing as the idea that because someone has "cried wolf" many times and there was no wolf, that means there can never be a wolf.
It's like the stock market - is it going to crash? Yes it is, but the timing is very uncertain.
The "powerful interests" are much more interested in you thinking that there is plenty of oil. As soon as the rabble figure out there isn't, they might actually get serious about alternatives, not good for oil co profits.
You have it bass-ackwards, peak oil terrrifies TPTB. It means the end of ponzi. The people propagating it have been "grass-root" level geologists and scientists. Those people that do not have a money driven agenda.
Real peak oil would scare them. You are lost.
Actually, your lack of a proper avatar is fitting. You must spend a lot of time with your head in a bag.
Peak oil is here. The supply problem has been temporarily mitigated by putting "more straws in the ground". Technology has been able to drill directly to smaller pockets of oil. The pockets are SMALLER, however. There have been NO giant discoverys of easy oil in 30 years.
Crude is where the energy is concentrated. There is more energy in oil, pound for pound, than anything except nuclear. But, it is all about transportation fuel. Nuclear and electric have their transportation inefficiencies.
Peak oil means the end of CHEAP oil. There will alway be oil. But how much oil does it take to get that oil out of the ground? At some point it becomes pointless. And as I've said, oil is the BASIC input to modern economies. Oil/energy enables growth. Growth enables debt. This is why "oil shocks" are shocks. The rapid change in price affects the debt markets.
And to those who disparage MHFT. I have been following his for free site for some time. If you are a trader, and can follow his recommendations, and trade the areas that he brings your attention too, it can be very profitable. Call me crass, but the reason I visit these sites is to collect information that is profitable. Not just to flap my gums now and then.
gh
+10 Way to actually understand the situation, unlike those who deride peak oil without even grasping the basics of the concept.
Oil has been peaking ever since I left high school in 1962. Thankfully it will really peak real soon now.
ANY non-renewable resource that is constantly consumed, will eventually "peak." All this means is that half of what was originally available is now gone. And of course, the easiest to access of that resource is used first, meaning the cheapest, most potent (Energy return on invested) is used first. Throw in the export land model and a few other variables, and you can understand what should be a concept any sixth grader could grasp.
Unfortunately, it's near impossible to convince men of anything if they have a financial incentive to not understand it.
Conventional oil production has already peaked. Meeting demand gets harder and harder from here out.
Colorado Shale Oil Net Energy = 0 Why bother?
http://lettersfrommrsunshine.blogspot.com/2011/02/shale-oil-contains-no-...
The oil that remains ain't easy or cheap, and a lot of it is a waste of time and money. Peak oil production happened in 2005, it has been flat at any price since. The Saudi's don't have 4mm bbl/day reserves, either, that's marketing. We'll find out soon the best they can do is maybe another 1mm bbl/day above their current level - for a short burst. Sure, OPEC wants high prices. They've got a lot of JPM debt service to pay, and a lot of people on the dole. They'd love to have an unlimited supply of oil to pay for it all. It's a finite world, though, and they've been sucking it dry for 70 years over there.
If easy oil was everywhere, BP wouldn't be trying to tap 300 degree hot natural gas liquids 13,500 feet below a 5000 foot ocean floor, ok? Grow up, folks - everything we 'know' about civilization is wrong, since it was based on 150 years of inheritance squandering.
Thorny
Ya bin watchin' a little too much Beverly Hillbillies. Oil was never "easy" nor "cheap". Ol' Jeb Clampitt and his buddies weren't explorin" with their squirrel guns.
The cost of Oil measured against per capita income or GDP will tell you whether it is cheap or not.
Oil aside, we are witnessing flattening world economic growth. Rolling Ma over on a cold winter night is far less attractive with TV and internet abounding.
Be careful that a piece of the sky doesn't fall on you when you go outside.
Kayman, and everyone:
Read a book.
OIL 101.
look on Amazon.
gh
I'll carry my parasol, Pollyanna.
Peak oil ressurection? Peak oil can die?
Stupid article as usual.
As long as powerful people have a vested interest in the peak oil fairy tale, it was continue to live.
cause no one has a "vested interest" in discrediting it? What a joke
History tells that the vested interest in discrediting it has won the game over the people with vested interest of crediting it.
By coincidence, the oil story started around the same time as people started to question the idea of coupling economical growth to a limited commodity like coal in the 1850s.
From 1900s to 2000, one can find easily opinions restating the risk of coupling growth to a limited commodity like oil in a very similar way to climate change by the way, that is by stressing the emergency of the situation.
100 years later (half the US lifetime), the situation is clear, people whose best interests was that peak oil happens brutally won the game over people who wanted to mitigate the peak oil crash.
Political Oil always. Peak Oil is a very long way down the road.
Get off your butts and look around. Exploration and drilling is booming. $70-85/bbl is a very nice price to make money at.
$200 will kill demand.
you cite the fact that "exploration and drilling is booming" as proof that peak oil is "long way down the road"....? Plus you forgot to add that desite this fact, production is flat or falling. All more drilling does is accellerate depletion
in hindsite,you will see peak oil was achieved in 2005
I was told it was 1975.
Yeah, I was once told there was a Santa Claus. The US peaked in C+C, and dry gas production in 1970, as was predicted in 1956.
The market is being manipulated. Some how new gas is selling for a relatively low price. I think the reason for that is that the secret market manipulators are trying to accelerate the crash. Or something.
Tell us now, how those speculators change flow rates
Occam's Razor is a very powerful tool in logic. Learn how to use it.
in the US
Oh no. That was earlier. In the 1970s the middle east was also running out. If peak oilers knew about the North sea they'd have included that as well. Of course, they didn't.
and where is the north sea now?
peak bullshit.......the only thing peak about oil is the price. come one, come all speculators, hedge funds, etc. all those flush with hot money come hither and fuck your fellow man being how you have no reason to speculate in oil or cotton or corn nor wheat, for yea have no reason in these markets other than to purely speculate. peak cotton...corn...wheat....rice, yea right!!!!!!!
peak oil is impossible because the earth is growing along with population
<sarc>off
jQp
Add time to your postulations and Peak Oil is maybe 3 generations away.
People slow down breeding as their per capita incomes increase so population growth will peak then fall. Look at Japan for a real world example.
Political Oil and Marketing Programs (fear induces price appreciation) dictate we will be hearing Peak Oil from you and the oil companies for a long time.
Sorry John, but Malthus and Chicken Little were wrong.
Political oil, big oil during their history, seldom played the peak oil card. On the contrary, they played the oil plentiful card.
Malthus was wrong because he postulated on standard averaged needs by people. Hence a direct relationship to number of people and overpopulation. Far from the current situation.
Current situation is different, one side of the world has ever increasing needs when the other is lagging behind terribly.
A declining population in number does not solve the problem in the current context. Japan might be on the decline but their consumption has been going up (even though they managed to stabilize on oil)
I remember oil peaking in 1962 when I was graduating high school. By 1975 I was reduced to subsistience farming. Wasn't I? I'm getting too old to remember.
You over-read what peak oil means. By pushing up the expectations, you want to be able to claim the event wont happen. Peak oil wont happen because you wont return to subsistience farming.
Peak oil simply means the end of the current growth paradigm. It does not mean return to subsistience farming.