The Peak Oil Conundrum
July 24th, 2006 by Grant in: Economics, Oil & GasSupply and demand is fairly straight forward. When supply out paces demand, the price falls. When demand creeps ahead of supply, the price increases to curtail demand.
It’s all very easy to understand, and it doesn’t take an economist to explain the principles and create models based on a given commodity and a set known values for supply and demand.
Take away the known values and the simple supply and demand problem becomes purely theoretical. Enter stage left: Peak Oil.
Peak oil, also known as Hubbert’s peak, is based on the principle that at some point in time, the world production of oil will start to decline.
Note that in the above sentence the key word is “world”. Oil, being traded on a world market, and hence influenced by geopolitical events, does not play out like a typical supply and demand problem.
Demand is rising across the globe and by metrics we can assign values to. An economist can plot out the growth rate of energy demand to several decades and have a good idea of how much oil will be required to power world economies through the middle of the current century. The catch is that the economist doesn’t know if there will be enough energy to go around.
In fact, no one does. Enter stage right: speculation.
Speculation is the driving force behind the volatility in today’s oil futures market. By the very essence of the word, traders are speculating on what the price of oil will be tomorrow. Sure, geo-political problems add to the speculation, but the basis of speculation pertains to when we’ll run out of the thick black goo that powers our planet.
Some say we’re sitting on peak oil now. Others say peak oil will happen by 2010, and still others say that peak oil happened way back in 1970.
No amount of engineering will produce that holy number that tells us when we’ll produce that last drop, but no one can argue that there is a finite amount of crude below us.
In my opinion, until we’ve exhausted all the opportunities to look for oil, the peak oil theory 
is purely speculation.
Only after we’ve drilled in the wild-life reserves in Colorado and Alaska, and after we’ve plopped oil rigs in all the places that environmentalists don’t want them can we place a life span on our oil supply.
Until then, prepare to pay dearly for your little slice of Hubbert’s peak.
More info on Peak Oil:
Four Corners Interactive discussion on Peak Oil
The Oil Drum
Hubbert’s Peak (wiki)
Peak Oil Portal
My Peak Oil.org
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July 25th, 2006 at 10:22 am
Nice article. Here’s my opinion: The price of oil is being controlled by the futures traders at the NYMEX pit and math savants sitting behind a computer serving the major banks. The exchanges have risen margin requirements but the speculators still control crude. Supply and demand models aside, the terrorist premium will have to subside before the price/gallon comes down to more realistic levels. So, Israel, Lebanon, Iran, Iraq….figure it out!!!!
July 25th, 2006 at 10:33 am
That’s true, the pit plays a large role and it’s obvious the market is trying to eek out every penny from oil. Let’s face it, if the market is willing to pay $80/bbl for oil, why not let ‘em buy it?
What many people don’t realize is that the futures market is a zero-sum game. With every trade, somebody wins and somebody loses, quite contrary to the general stock market.
SO, if a bank buys oil at $75/bbl, they’re buying it from someone else that thinks oil is going lower; notwithstanding the short side.
Ah, the beauty of the free market!
Thanks for your opinion!
July 25th, 2006 at 7:43 pm
Great write up. My money is on oil for the long term, unless we somehow create fusion power everytime we drink beer. mmm beer.
July 26th, 2006 at 5:15 pm
I like Tom’s idea! I would sure be able to produce a lot of energy.
I think the speculation is a healthy part of the market to some extent. Plus there’s no better way to control demand than through the allmighty dollar! ED