As someone who doesn't subscribe to the theory of Peak Oil, let me offer my dissenting views.

First of all, it is possible for oil prices to go up even without Peak Oil if the US$ declines substantially (I don't think it will happen but some are expecting the US$ to decline a lot more). For the sake of argument, let's assume these people are predicting $200 oil based on present value and not based on substantial US$ decline. Anyway...

As I have been saying for a while now. a lot of the Peak Oil theory is based on high growth rates in developing countries, along with pretty good growth in developed countries. This rarely lasts for long. Investors, economists, and policymakers love to project the present far into the future but it never turns out that way. It wasn't too long ago, 1997 in fact, when the Asian Tigers (South Korea, Taiwan, Malaysia, Singapore, Indonesia) that were supposed to be the next big thing and continue to grow rapidly ran into big problems. Oil, if you recall, hit its bottom (in nominal terms) in 1998 with the fall of the Asian Tigers.

Right now, people are projecting 8%+ growth rates in China and India, along with fairly high growth rates in other developing countries, like Brazil, Vietnam, and so forth. I am pretty sure these rates are going to end up being completely wrong. Already China is running into massive pollution problems, not to mention bubbles in stocks, real estate, and manufacturing. If these growth rates end up being lower than forecast, the Peak Oil dates will be delayed. The dates can be delayed by decades even.

Secondly, most Peak Oil theorists ignore basic economics. Namely, demand should go down as prices rise due to scarcity. This is almost a law in economics and I'm not sure why Peak Oil theorists seem to ignore it. So far demand hasn't dropped with rising oil prices because it is not significant enough to impact profitability margins, and hence slow down the economy. It is highly improbable in my opinion to have developing countries, whose businesses tend to have razor-thin profit margins and are highly vulnerable to raw material costs, grow at a high rate if oil prices rise substantially. For instance, many Chinese factories have very thin margins and will go bankrupt or curb production if oil prices are high. The increase in prices will also impact consumers. Right now the higher classes (upper middle-class and higher) still buy fuel-hungry cars such as trucks, SUVs, large cars, and so on. I will guarantee you that if oil prices go up quite a bit, very few will buy those cars. Lower classes will revert to greater use of public transportation if oil prices go up a lot higher.

 Lastly, as prices rise, technologies and materials that are competitive to oil will emerge. Similar to how railroads have all of a sudden become cost-competitive with trucking due to high oil prices, I suspect many alternative energy sources will take off. This can range from hybrid automobiles (autos are a big user of oil) to increased use of insulation (insulation can save 40% of a building's energy loss (most are already insulated so the savings will be lower but there will be greater incentive to improve what is already there)).

KB... 

Basic economics are noting more than a theory which is supposed to fit most real situations.  But no true economist would expect a perfect fit, and would have to make allowances for actual conditions.  In the case of petroleum, one has to look at relative cost of replacements, and see what price level oil would have to reach, to be viable replacements.  Oil, even at $80 a barrel is really cheap compared to most alternatives, when one takes into account ALL costs.  So...while its true that replacements will assert themselves at higher prices, we are far from the point of a wide array of such crowding out oil.  If you have read even one book on the subject, (happy to direct you to some), you would know that the more credible peak oil proponents do discuss such alternatives.  None of these peak oil folks, or even the major oil companies, see these replacements as viable for many years to come.

And so now China is the only source of oil use?  We need to look at global oil consumption growth, or you will not really understand what is going on.  Bottom line, developing and newly developed countries are experiencing huge growth in use of oil, but supply is remaining relatively static.  Oil consumption has only shown one meaning reduction in decades, and that was from the 70's oil embargo.  Why would we expect this multi-decade trend to just reverse?  It might with oil at $150 a barrel, but that would be because the world economy is keeling over.  Not a good way to manage consumption.    

I would also like to point out that you have been wrong about the price direction of oil for many years now.  Maybe your theories are not in synch with reality?   

 

Alex...:

Basic economics are noting more than a theory which is supposed to fit most real situations.  But no true economist would expect a perfect fit, and would have to make allowances for actual conditions.

You can't get more truthful than basic supply & demand. It isn't merely a theory that may or may not be true at times. My mention of supply/demand and prices is not really a criticism of Peak Oil per se but an attack on those htat predict catastrophic consequences. As long as the free market is allowed to function, higher prices will mitigate these disaster scenarios.

 

Oil, even at $80 a barrel is really cheap compared to most alternatives, when one takes into account ALL costs.  So...while its true that replacements will assert themselves at higher prices, we are far from the point of a wide array of such crowding out oil.

I look like the dumb one because it's hard to argue my point when the world economy, including the US one, has been booming for years. I think we need to see how oil behaves during any slowdown. You can say that the marginal replacement cost is high but the fact that the market has not priced in even higher oil prices or more investments have been made in alternative energies makes me think that Peak Oil isn't a sure case. Even the major oil companies have been reluctant to pursue higher cost oil production (such as oil sands) because they are not too confident of prices. This doesn't mean they are right but it remains to be seen...

 

 

Oil consumption has only shown one meaning reduction in decades, and that was from the 70's oil embargo.  Why would we expect this multi-decade trend to just reverse?

The trend is not what is important; instead, it's the price. Oil consumption has indeed been rising for decades, probably for the whole century with some breaks but if demand is low it doesn't matter much. For instance, all throughout the 80's and 90's, demand had been growing but price actually dropped (with a trough in 1998). If price didn't drop in the 90's, I'm sure demand would have contracted.

Furthermore, for investors, the price is what matters. Anyone who invested in oil blindly in the 80's and 90's underperformed the broad markets. Except for some good performance by companies like ExxonMobil, most who went long didn't do too well. This was the case even though demand was rising. 

 

It might with oil at $150 a barrel, but that would be because the world economy is keeling over.  Not a good way to manage consumption.   

I would argue that's how consumption is generally managed. Governments may attempt to intervene (often with detrimental results) but it is the price that controls consumption. That's why there is going to be zero fallout from the Peak Oil theory even if it were true...  

I would also like to point out that you have been wrong about the price direction of oil for many years now.  Maybe your theories are not in synch with reality?  
 

 That's a possibility I have considered. But since there hasn't been any economic slowdown, I'm willing to stick with this view. My view is that there are a lot of bubbles in places like China, India, etc, which heavily impacts oil prices, and since I see these bubbles popping, I'm sticking with my view.
 

Just because someone is wrong for a few years doesn't mean it's correct to switch views. Since I'm claiming oil is driven heavily by speculation, and since speculative action causes things to be irrational for long periods, it doesn't mean anything to be wrong (just make sure you don't short and lose money or something). For instance, anyone who thought tech stocks or large cap growth stocks were overvalued in the late 90's was wrong for many years. In the end, there stance was correct though. A lot of people who profitted immensely from the bubble lost it all. People made more money in one year (99) than they did in several years but it was an illusion. Similarly, anyone who was cautious with the Asian Tigers back in the mid 90's was wrong for years but proven right in the end (as a side note, I think the present situation is similar to that)...

If my thesis for arguing against oil was not based on speculation then staying wrong for a few years is probably a bad decision. But if it is speculation then asset prices can stay irrational for a while... 

You...are...lost, if you think the current price of oil is purely speculation.  Equating the current oil supply / demand conditions with dot.com stocks is just beyond me. 

Here is a thought.  If you would have merely invested in a basket of Canadian stocks, which would have necessarily included some natural resources plays, you would be doing quite well.  But instead you have decided to invest in dollar denominated long dated treasury bonds, when the US is running unprecedented trade and government budget deficits.  Are you sure you really know how to measure supply and demand?  

sigh...good luck with that.  You are still losing money.  The burden of proof is on you to show your position is correct as these years go by. 

 

Alex...:

sigh...good luck with that.  You are still losing money.  The burden of proof is on you to show your position is correct as these years go by. 

 

 

Agreed... so let's just wait and see how oil behaves if growth misses consensus forecasts in the coming years... 

Sorry Alex you are incorrect that oil consumption went down during the oil embargo of the 70's. We did suffer great long gas lines then but the oil consumptioon stayed level and even went up for 2-3 more years. It only went down when President Carter told the world to turn off all the extra lights and turn down the heaters and forced Detroit to made cars more efficient and forced people to drive 55 MPH and so forth. Now no one liked these measures much but the net effect was to put a big dent in oil consumption. Look at any long term graph of oil consumption and it will show a significant world wide decrease of about 5-10% starting about 1977 and lasting for 3-4 years while Carter was in office. Well it took the world oil powers about 2-3 years to really really realize that the US might be serious about saving oil and that their best customer might gain back some control so they flooded the market with oil to try to stop this conservation idea.  Well the price of gas/oil went down drastically after that due to the oil glut in the early 80's.

Now in the current market no one and I mean NO ONE is really conserving much oil and NO world leader is showing anyone much incentive to really save oil.  So until that happens I don't think the price of oil will go down much....

 Just my two cents,

Bill 

 

 

 

 

What's scary to me is the attitude of our present culture. There are so many things we can do now, easy things, that would reduce our dependence on oil. Yesterday morning it was in the sixties and as I sat outside an office bldg. waiting for it to open, a lady sat in her car and idled her car engine for a good fifteen minutes. I see the same thing every day, everywhere I go. A few weeks ago, we had a dinner(plant based) and afterwards my sister-in-law volunteered to help do the dishes. You should have seen her jaw drop when she could'nt find a dishwasher and starting looking around and noticed there was also no disposal, no trash compacter or clothes dryer.  She acted like it was the end of the world and  I thought she might have a coronary for a moment. I finally told her(she's half my age) to set down and I would take care of it. I tried to explain to her we did'nt need many of what are really luxuries our society now considers necessities, but there was no way she could wrap her mind around it. I tried to suggest alternatives to her and she got angry that anyone would deny her all that she wanted and was entitled to. I have always been very good at predicting the future(that's why I'm at home typing while others my age are out in their rat race) and my final prediction is that the planet is jacked. Still it might be a good idea to start changing one's attitude and lifestyle. It's just a thought.

Speaking of my prediction that the planet is basically jacked at this point, I just read a column by Thomas Friedman in which he concludes basically the same thing. He states: "that he is a climate skeptic - not a skeptic about climate change, but a skeptic that we're going to be able to mitigate it. We Americans are still the world's biggest energy hogs, but we're now producing carbon copies or ourselves in places you've never heard of. Yes, "Americans" are popping up all over now - people who once lived low-energy lifestyles but by dint of oil wealth or hard work are now moving into U.S.-style apartments, cars and appliances. Our planet cannot tolerate so many "Americans', unless we take the lead and change what it means to be an American in energy terms. There is no green revolution, or, if there is, the counter-revolution is trumping it at every turn." One tries to save energy as many ways as possible and when you get on the highway and your fellow Americans are not even obeying the speed limit(something so easy to do to conserve fuel) is is very disheartening and you feel like all your efforts are in vain. The major part of my life is over, but I have to shake my head in despair at what the youngsters are up against. And yet, no one I talk to seems too concerned or even interested in a conversation about it. I agree with Thomas Friedman, there appears to be no mitigating it. Good luck young people, you will need it like never before.

skillet:

And yet, no one I talk to seems too concerned or even interested in a conversation about it. I agree with Thomas Friedman, there appears to be no mitigating it. Good luck young people, you will need it like never before.

 

Don't you think the free market, via prices, will control people's behaviour? If you ignore the oil-to-da-moon bulls, higher prices will force people to cut back their usage. People predict all sorts of high growth in energy consumption, plastic use, food usage, etc, in developing countries but it is going to take a lot longer. The marginal cost of increased usage will go up and up. What is being used now are the cheaper stuff and it will become more difficult for people to afford this.

If you ignore the oil-to-da-moon bulls (Koala)

Good thing we ignored the oil-price-no-where-to-go-but-down bears back last Jan, or I'd have a lot less FAT gains in my portfolio today....