Fearless Money

At my last job, I had a coworker who went on at great length about the immanent threat of "Peak Oil." That’s the point at which the world will have peaked oil production. We’ll be on the other side of the mountain then, running empty. I never believed him, though it was politically unpopular for me to believe as I did.

It isn’t that I don’t think we will eventually hit such a point, where production inevitably begins to decline despite companies and countries’ best efforts. That’s obvious. What I believe is that it isn’t all that close, more like decades than years. Further, I believe that technology will extend the down-ramp for many years. Further yet, I think the world will be ready at that point to transition to something else.

How can I think this?

Well, firstly, I am an optimist. I don’t understand the point of pessimism, to be honest. It feels like such a limiting and self-defeating world-view. You can see it in some of the peak oil fans’ writings, where they argue that the world’s economies must shrink to avoid disaster. As Guy Kawasaki would say, "That’s Bull Shitake." It doesn’t help anything, because no one will voluntarily go that direction.

In Paul Zane Pilzer’s excellent “The Fountain of Wealth”, he makes several points about this doom and gloom thinking. One of the most convincing is the parallel between petroleum and whale oil. In the 1800s, the entire world economy was as dependent on whale oil as we are today on petroleum. Did the world end when the whales basically ran out? No. We switched to something else, remarkably quickly. This despite the doom warnings from all the economists of the day.

The Economist makes these points very strongly, with a capitalist twist. They argue that the sky-high price of oil today is actually giving incentive to competitors. It is hard to compete with $20 oil, but reasonable to try with $60+ oil.

From the Economist article Steady as she goes:

But is the world really starting to run out of oil? And would hitting a global peak of production necessarily spell economic ruin? Both questions are arguable. Despite today’s obsession with the idea of “peak oil”, what really matters to the world economy is not when conventional oil production peaks, but whether we have enough affordable and convenient fuel from any source to power our current fleet of cars, buses and aeroplanes. With that in mind, the global oil industry is on the verge of a dramatic transformation from a risky exploration business into a technology-intensive manufacturing business. And the product that big oil companies will soon be manufacturing, argues Shell’s Mr Van der Veer, is “greener fossil fuels”.

What of the notion that oil scarcity will lead to economic disaster? Jerry Taylor and Peter Van Doren of the Cato Institute, an American think-tank, insist the key is to avoid the price controls and monetary-policy blunders of the sort that turned the 1970s oil shocks into economic disasters. Kenneth Rogoff, a Harvard professor and the former chief economist of the IMF, thinks concerns about peak oil are greatly overblown: “The oil market is highly developed, with worldwide trading and long-dated futures going out five to seven years. As oil production slows, prices will rise up and down the futures curve, stimulating new technology and conservation. We might be running low on $20 oil, but for $60 we have adequate oil supplies for decades to come.”

Alternative fuels will not become common overnight, as one veteran oilman acknowledges: “Given the capital-intensity of manufacturing alternatives, it’s now a race between hydrocarbon depletion and making fuel.” But the recent rise in oil prices has given investors confidence. As Peter Robertson, vice-chairman of Chevron, puts it, “Price is our friend here, because it has encouraged investment in new hydrocarbons and also the alternatives.” Unless the world sees another OPEC-engineered price collapse as it did in 1985 and 1998, GTL, tar sands, ethanol and other alternatives will become more economic by the day.

Technorati Tags: economics, oil, peak oil