Peak Oil, Peak Energy, or Peak Nonsense?
I just don’t get the arguments on Peak Oil.
Yes, I am a firm believer that oil prices have a good chance of moving higher – maybe much higher. Geopolitical risk (Think Iran) can cause major disruptions in supply that could send prices soaring.
I have no doubt but that depletion rates are in a tight race with new supply additions that are creating difficulties in keeping the supply curve for oil from shifting to the left.
Yes, I believe the demand curve for oil is shifting to the right as new consumers are added to the market.
Having said all that, I just don’t think that peak oil is going to unfold as many people think. Our transportation industry is fueled by oil. Our electrical grid is not (though oil is certainly needed to move some coal and other input to the electrical grid.) I believe the US and the rest of the world will manage just fine is a world of rising oil prices due to scarcity. There are just too many substitutes for oil as prices rise.
Think about $100 oil. At that price, we will see a bit less driving, a move to higher fuel efficiency cars, a bit more use of public transit, a move to drill, drill, drill, a slow move to natural gas as a transportation fuel, a slow increase in electric vehicles, somewhat more expensive cost structure for lots of products, etc, etc, etc.
Markets tend to work if you let them. It doesn’t mean higher prices don’t cause somewhat lower living standards in the short run. Think of the most basic economic analysis. Any time the price of a product you are buying goes up you are worse off. However, the substitution effect helps mitigate the negative income effect.
At $100+ oil expected to last forever, my guess is that the US would see the quantity demanded fall by 10-15% in the near to intermediate term. I know my family could do this without undue hardship, though I am sure many families would be hit hard.
While new oil production takes time to bring on line, there is still a lot out there that looks very attractive above $100. And more and more becomes attractive at higher prices.
As a well known hedged fund manager said (and I paraphrase): to believe in peak oil you have to also believe in peak ingenuity. Look back through time. As whale oil became more scarce, many Europeans believed their countries would go dark. At the peak of horse use in the US, many believed the problem of manure would overwhelm the cities. It goes on and on. In every case, the doom and gloomers have been proven wrong
Industrial societies need base load electricity to function. While oil plays a small role, Nuclear, nat gas, and coal drive todays electrical grid. The concepts of renewable energy and sustainable energy make no sense to me. I guess I am old fashion as I still believe the 1st Law of Thermodynamics. I understand the idea of wanting to produce energy in a way that has the lowest environment impact on land, water, air, etc. But given that ENERGY CAN NEITHER BE CREATED NOR DESTROYED what the heck does sustainable energy mean. How do you create renewable energy?
When you look at the energy content available through nuclear options, it dwarfs all the energy available from oil, coal, wood, wind, solar, tides, hydro etc. Do the math (E=mc^2). Nuclear options can provide millions of times the energy of all other forms of “traditional” energy. It’s not even close.
The bottom line is that the US and the rest of the world have all the energy needed to continue to improve the standard of living for the worlds’ population.
I believe the problem we face is that our leaders are poorly trained in economics and the functioning of markets. I believe (hope) this will change over time. Unfortunately, it’s not looking good right now.
In the near term, let’s open up exploration in areas that have been off limits. How does CA justify keeping PXP from producing T-Ridge as one small example of shooting oneself in the foot? Why has there been such a backlash against nuclear power? What the heck is nuclear waste? Oh yeah, we outlawed reprocessing. Climate change? What a shocking concept. Like the climate hasn’t been changing for 4.5 billion years.
Co2, Co2, Co2, what the heck is the problem with a little more CO2. The release of CO2 back into the atmosphere (from whence it came) is as likely to be a positive externality as a negative one. I have seen no evidence of any man-made climate change from CO2. Not to say there couldn’t be a small one. Basic physics (partial equilibrium analysis) shows a doubling of CO2 increases temps by about 1.2 degrees C . All the bad stuff is suppose to come from the feedback effects. The evidence today points to negative rather than positive feed backs. Does anyone really think that a highly non-linear dynamic system that has been around for billions of years is dominated by positive feedbacks. Such a belief lacks any theoretical foundations in my view.
The whole climate change crowd (as well as the government run health crowd) is driven by a quest for power. Yeah, yeah, they all want power to “do good.” BS. They want power to impose their views on others.
Anyway, This has been a great trading market. Hard not to like the MMR/EXXI/PXP play. Love TAT (as long as Turkey doesn’t implode.) TRGL’s oil potential in the heart of Europe has tremendous option value. Love(d) the Bakken play. Water and CO2 flooding offer great potential (DNR, REXX, CFW (small!). SD looks way over sold on future oil and gas production. IOC is interesting as always – wish we had a full blown flow test. GTE and PNG- Columbia rocks. Is BPZ finally getting it together. The pipes make sense to me. LNG transport – how does it not grow – GLNG. Man the list goes on and on. At $75 oil, there are lots of companies that can offer incredible return potential.
Shale gas is a tough one. Love the play, but the economics look challenging at current prices or below. Once again we are faced with a fallacy of composition – every company can grow production and the leftward shift in the supply curve won’t affect price. Good luck with that one.
Got uranium? A LT play that makes huge sense in energy.
The service guys offer great LT upside. RIG below 80, no brainer - if you have time horizon. How do SLB and HAL not have upside in a high priced energy world. KEG looks interesting below $10.
Too little time and too many companies that can offer investors tremendous upside. Keep your topknot on cus we still got to go through the deleveraging process. One way or the other, it’s coming.
Best of luck
Risky |
