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Monday, April 24, 2017

The Gloom and Peak Oil

Posted by Tim Stobbs on July 7, 2008

Ok I have to admit. Investing today is getting a bit more difficult. Why? It looks like the gloom is setting in over everything. News stories seem to be focusing on “X number of jobs cut”, “stock markets down”, “home sales cooling off” and my personal favorite “oil choking global economy”. It’s just a depressing kind of place where money goes into something and I actually expect it to go down further.

So what to do? Simple. Keep investing and put on your blinders to some of the noise. The media often seems to overstate the trouble of everything. For example I don’t recall a news release with an oil companies profits lately. That should cheer up some investors for a little while. At the same time if oil does keep going the way it is we would have entered the peak oil world which brings up an interesting question of if we should continue to invest they way we have.

Assuming for the minute peak oil is true as a theory (for those of you not familiar with it read this) and that it is here now or will be shortly. This would result in a rather fundamental shift of how people do business. Up until now transport was always taken for granted as being cheap. So getting something made in China where labour is cheap is possible do to cheap transportation costs. It is cheaper to do that than let someone in North America do it due to the difference in labour costs. If transportation is now more expensive that China may lose that advantage and now it makes sense to do things more locally. Why? Cheaper transport costs due to less distance traveled.

So if the shift for companies becomes local based will they get squeezed out of the local market due to more nimble small businesses which can react faster to the changing economy or will the big business world adjust to new reality of expensive transportation costs and continue to produce profits?

Overall I don’t know, but in any case a shift of some kind is likely soon. 6.5 billion people and growing population and cheap oil can’t go on forever. So what do you think? Is peak oil valid or bullshit?

This post is now part of the 161st Carnival of Personal Finance.

Comments

8 Responses to “The Gloom and Peak Oil”
  1. “Is peak oil valid or bullshit?”

    There has to be a peak at some point, right? Oil is obviously a nonrenewable resource in the sense that “making” new oil would take several million years. Is the peak here yet? I think it’s probable. At the very least, I’m personally planning on gas prices continuing to increase until we’re paying at least as much as other developed countries in Europe and Asia do. Won’t make much difference in my investments as I don’t pick stocks but does make a difference in budget choices like planning travel carefully.

  2. Anjo says:

    No, it’s not here (yet). There have been recent statistics indicating that supply has been increasing at a greater rate than demand and have also been recent discoveries of oil fields (i.e. Petrobras in Brazil). However, agree with Rachel’s comment that we can’t make “new” oil. As long as oil is perceived to be a limited supply commodity (whichwill continue to happen), can only go up in in price in the long term. Perception is reality…

  3. Traciatim says:

    Oil is a finite resource like the sun is a finite resource, sure. . . eventually the sun will turn off, what’s our plan of action?

    Possibly we are at the end of finding really easily accessible oil that comes out of the ground when you stick a straw in it . . . but we’re not running out of oil any time soon.

  4. Pragmatic says:

    Oil is a finite resource and therefore a peak is inevitable. The arguments out there on the exact time of the peak go from we’ve already peaked to we won’t peak for at least another 40 years.

    I happen to be one of the folks who believe that we have already hit peak. Or, at least peak for the cheap light sweet crude. Since coming upon the peak oil theory about five years ago, I have read as much as I could on the topic and the arguements and data is very believable.

    Even without the emerging developing economies, our current supply of oil is very tight. Sure, we may be able to find new sources of energy – wind, solar, geothermal, nuclear. but that will only be a result of oil getting more and more expensive. It will get more espensive because the supply out there is not increasing. Sure many will start telling you about untapped resources – Petrobras’ new find, or the Jack discover in the GoM, or the potential for drilling ANWR, etc. The fact is that these finds won’t replace the annual consumption that we are using right now, and in the case of offshore, deepwater drilling…they are very expensive. it’s not like the 10 dollar cost the Saudis need to recover oil…deep water drilling I’ve read can cost anywhere from 60 to 100 bucks a barrel to extract.

    I could go on, but there is so much information on the topic, you can do some simple research for yourself and decide.

    I am reminded of a report Jeff Rubin put out last month. The one line I remember distinctly was that “Globalization is reversible”. As energy gets more expensive, we will have to relocalize our economies. It means that compentitive advantages of cheap labour get washed away when the cost to transport the raw materials and the goods back to you are prohibitive. It means that everything will start to become more expensive.

    I have often wondered if your ‘retirement’ at 45 with a semifixed projected income was going to be realistic in an inflationary world. I hope you have done some sensitivity analysis with inflation and rising cost of goods and services.

  5. Anjo says:

    Good points Pragmatic, it is difficult for us to envision a world without oil. I do think that the high price of oil is timely, as it is putting pressure on auto makers and others to find more sustainable alternatives. I will be greatly relieved if I see a day in my life where the vast majority of our energy sources are considered to be environmentally friendly, and if we have to deal with high oil prices to get there, then so be it.

  6. Sarlock says:

    I am not certain we have in fact reached peak oil per se, as I think this recent price spike will do wonders to temper demand enough, but we aren’t far off from the peak, that’s for sure. Be it in 2010 or 2012, it isn’t far off, and the price of oil jumping to near $150/bbl represents the squall lines before the coming storm. In 5-10 years, $150/bbl might seem extremely cheap.

    Oil itself will be around for another century or two, but as our production capacity/supply diminishes and we switch to more and more expensive forms of oil extraction, the price will become so high that our use of oil as we know it today will cease. It will become a precious resource reserved only for those activities that can make its high cost burden economical.

    It remains to be seen whether we can develop another energy technology that is as cheap as oil, but I doubt another feasible replacement exists that has the broad versatility that oil has. Instead, multiple forms of energy generation will co-exist, feeding specific functions which are best suited for it… and these are likely to be much more expensive on a per joule basis than oil is.

    Unfortunately, human beings have demonstrated repeatedly over history that even when they know something is doomed to occur, they don’t make a change to their habits until it’s too late. And so it will happen with oil: prices will drop a bit and we’ll get used to $1.30 gasoline and then when peak oil truly does hit and we start running short of oil as a society and the price goes sky high (how does $4/litre gas sound?)… only then will we cry for change and wonder why our politicians didn’t have the foresight to save us from this doom.

  7. Cash Canuck says:

    Say goodbye to international travel. In the early days of commercial air travel, it would cost half a years pay for a trans-oceanic flight. It’s likely that this will happen again someday. As far as when? I don’t think anyone can say for sure.

    Improving extraction techniques (oil sands) and new deposits (methane hydrates?) made economical by high prices should keep the supply at a reasonable level. If supply drops and those processes/deposits become un-economical, producers will cease operations until demand necessitates a re-opening.

    Running out of oil? Not for centuries, but we will have to change the way we live and make choices with the cost of energy in mind. Frankly, I find the idea of the world consuming less oil refreshing. Bring on $4 gas!

  8. Canadian Dream says:

    Good comments everyone.

    @Anjo
    Realistically as the world population continues to expand demand will easily outstrip any new finds. I think perhaps we are the peak of new easy oil finds as per Pragmatic’s comment.

    @Pragmatic
    Yes I’ve considered as few problem areas with my projection. High inflation and a recession is fairly evil to my plans. Yet at the same time I’ve considered the fact I’m likely going to be doing something in retirement that will earn some money (which isn’t included in the plan). Additionally I’m planning as one of my first projects a small ecohouse to live in which should be designed to reduce my energy dependence fairly significantly. I’m researching my ideas now to determine which technologies to use. I’ve even thinking about skipping natural gas entirely.

    @ Cash Canuck,

    Excellent point. Air travel will become much more expensive again. My travel plans might drop back to one long trip to Europe where I spend like 6 months overseas.

    Tim

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