Saturday, September 08, 2012

Creeping Peak Oil, or Peak Oil Lite: 3 Arguments Worth Reading

Peak Oil is difficult to pin down, with as many definitions as there are believers. But the most credible version of "peak oil" asserts that over the long run, oil prices are most likely to jack themselves up as every new source of oil becomes more expensive to produce.

Proponents of this view do not argue that the world is running out of oil -- merely that it is running out of "cheap oil." This "creeping peak oil" or "peak oil lite" is a far cry from the style of cataclysmic collapse of oil supplies, which many other branches of the peak oil belief system tend to favour. It is worth looking at some of the arguments promoting this view:

In "Peak cheap oil is an incontrovertible fact," writer Ambrose Evans-Pritchard asserts that oil demand from China will soon explode through the roof, that old oil wells are depleting faster than is being claimed by oil optimists such as Leonardo Maugeri, and that new sources of oil are too expensive to allow oil prices to fall very far below current prices.

In "Oil's Rising Baseline," Casey Research argues that oil prices are following a series of upwardly ratcheting baselines which are only likely to ratchet upward even further. The article goes on to predict that Russia is moving into a position to control world oil & gas prices. The author suggests that a new baseline of $200 to $300 a barrel is not out of the realm of possibility for the near future.

In "The Re-pricing of Oil," Gregor MacDonald provides the most comprehensive argument for creeping peak oil, of this group of three. He makes the point that marginal oil producers operate on tight margins, and cannot tolerate significant drops in oil prices. He also points out that surplus oil production is not particularly high at this time -- compared to historical levels in periods of "oil glut" -- which influences oil markets to price oil higher in anticipation of tighter future supplies in the face of higher future demand. And he asserts that new oil discoveries will be more and more expensive to produce over time.

These articles are part of a coalescing concept of peak oil centered around an extended undulating plateau rather than a sharp peak and drop-off model. According to this concept, oil prices will rise higher and higher from now on, while global oil supplies will gradually grow tighter and tighter. Oil will be available, but at higher and higher prices.

The problem with all of these views, is that they make predictions. It is very hard to make accurate predictions, particularly about the future. And these particular predictions are being made about the future.

The same arguments as these were made 5 to 10 years ago. Many institutional investors who bet the money of their clients according to the logic of these arguments, created spectacular losses for university endowments, institutional and governmental pension funds, mutual funds, and more, when their expectation of a monotonically increasing price of oil failed to hold up from 2008 onward.

In other words, these are all fine and reasonable arguments as long as they remain in the abstract, and one is not being held to any particular prediction results.

We will return to these ideas in the near future, to determine whether there is any solid basis for timely prediction, beyond the vague generalities.



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