Events move quickly these days. Two months ago oil was north of $78 a barrel and, nationwide, gasoline was above to well above $3. The Middle East was threatening a conflagration and another exciting hurricane season was in the offing. Even the concept of peak oil was starting to get some scattered but serious attention in the media.
Now here we are at the end of September. The price of crude is down nearly 25 percent. Gasoline is down 75 cents a gallon. The press is full of stories of a great new oil find in the Gulf that could show the way to a cornucopia of oil. The Dow is pushing an all-time high, and financial analysts are predicting lower inflation and solid growth in the year ahead. Finally, those who don’t want to believe in peak oil are loudly proclaiming, "I told you so."
What happened? Is imminent peak oil still in the cards? Just where is reality?
The first thing to remember is that the price of oil has had a great run-up in the last five years. Way back in 2002 oil was circa $20 a barrel. Although there are many factors that go into the price of oil, they sort of group into three general categories: 1) Underlying supply and demand for the product including genuine hedging; 2) Technical factors that stem from the nature of commodity speculation: overbought, oversold, charting, stop loss orders, margin calls, etc.; 3) The sum of all the speculators’ ideas as to whether the price will go up or down— the fear factor. All of these factors are present all of the time. The eternal argument is over how much of the current price is due to which influence.
Every jump in the price of oil earlier this year brought forth remarks about the "fear factor." Speculators were constantly afraid something so bad was about to happen that the price of oil would soon be over $100 a barrel so the current price was a great bargain.
A couple of months back this was not a bad idea to have. The forecasters were talking about a third year of giant hurricanes tearing up the Gulf. The Iranians were firing off missiles and muttering about closing the Straits of Hormouz. In Nigeria, a foreign oil worker a week was being dragged off for ransom. Israel and Hezbollah were hard at each other and were threatening to trigger a wider war. It would have been hard for a speculator not to conclude that at least one of these looming problems would result in higher oil prices.
But then the great pendulum of events reversed. One by one the fears began to melt. Diplomacy quieted much of the Middle East. The hurricanes of 2006 curved towards Europe where they harmlessly watered the fields of Ireland. Nigeria turned quiet. Chavez kept threatening, but the speculators no longer listened.
Fear factor after fear factor diminished into a perfect storm of good news. Week after week the good news for oil prices kept coming. US stockpiles continued to build. Cooler weather reduced the use of natural gas for air conditioning. A giant oil find was made in the Gulf of Mexico. Even the US economy cooperated by showing some signs of slowing, thus raising the specter of reduced demand for oil.
As the price fell, the normal technical factors of speculating came into play. The bulls bailed out. Margin calls were made. Overcommitted hedge funds went bust.
Now what does all this have to do with peak oil? The short answer is, so far, very little. Naturally, higher or lower prices will affect demand and therefore exacerbate or mitigate the supply situation. Tight supplies already are reflected in the base price of oil before we get to the speculative factors. This is how we got from $20 to $60 a barrel. If the price stabilizes in the neighborhood of $60 after the speculative premium is wrung out of the market, then we will have some idea of where simple supply and demand for oil prices the product.
Behind all the good news for oil prices, however, depletion of the world’s finite oil supply continues at 85 million barrels per day, day after day, after day. Bad news for the future of oil production continues to come out, but it is lost in the shuffle or not recognized for its importance. Many now hold that the good news of a great new oil find deep beneath the Gulf of Mexico is, in reality, bad news. If ultra deep-sea oil, which is very expensive and may take many years to exploit, is all we have left, then we are close to the end of cheap oil.
During the last few weeks, slippages in major oil exploration projects have came to light. Of particular note is the BP’s great Thunderhorse platform, which seems to have developed metallurgical problems associated with extracting oil from great depths. If this turns out to be a generic problem, then the new frontier of ultra deep-sea oil wells may be a while in coming.
The bottom line remains that peak oil is still very real and, if anything, the news from recent weeks suggests the peak may be moving closer rather than receding.
An interesting sidelight to the last few weeks has been the paranoia surrounding rapidly dropping gasoline prices. According to a Gallup poll, 42 percent of Americans, mostly Democrats, believe that the administration is deliberately manipulating gasoline prices to improve their chances in the November elections. As noted above, there are numerous factors that are more than adequate to drive down prices to current levels. Prominent among these factors is the normal drop in demand between the summer driving season and the winter heating season.
In 2005, gas and oil prices experienced a similar drop after the spike caused by the summer hurricanes.
Therefore, the message of the last few weeks is not to confuse lower gas prices with any lessening of the threat from peak oil. The peak is still out there and is moving inextricably closer. In the meantime, enjoy low gas prices while they last. OPEC is already wildly signaling that its members can’t live with oil below $60 and that production restrictions are coming shortly.
For readers who are seriously concerned about the imminence and consequences of peak oil, the US branch of the Association for the Study of Peak Oil, ASPO-USA, is holding a World Oil Conference in on 26 and 27 October. For more information or to register, their website is www.aspo-usa.com.