Why “Peak Oil” Will Never Lead To $500/bbl Crude Oil

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21

I am thinking about how this relates to health care. There was much gref for people wanting better health care because the people who did not want it was not wanting “nationalization.”
If this is picked up by the anti-nationalition groups, then we could see $500.00/bbl. It took thirty years to get health care reform to become law. So, how long before the hurt of oil prices will cause a simular nationalization questions? I know that “national security” is a good reason to nationalize things, but I also know that there are real problems if that happens too.

 

 

22

Using the same concept of “reflexivity”, why wouldn’t we expect a rather low ceiling on the future price of gold?  What is the advantage of having physical gold when the government (s) can quickly change the price, and the rules on how it can be owned and/or traded?  I understand the argument for physical possession over a paper right, but not when the rules have a high likelihood of being modified to my detriment.
The same concept applies to the question of whether or not to convert all or a portion of one’s IRA assets to a Roth account.  Isn’t it more likely than not that the rules will change allowing these accounts to be raided in the future?  If so, than many of  the forward-looking maneuvers we all hope to execute to preserve and sustain wealth, safety, and quality of life may be in jeopardy.

Rob

23

Perhaps you think my assertions that governments will eventually intervene in the free market system are far-fetched?
If you think that government intervention in a free market system is a far fetched proposition I’ll assume that you’ve been living as a prisoner of war, stranded on a remote island, or trapped at the bottom of a well since the 1920s. 

A good way to point this out (if you had to) would be to look at what has been done recently to save the financial system.  There’s been some open intervention there to put it mildly.  Oil supply and money supply are one in the same.

24

At some point you have to decide that enough is enough and refuse to obey.  If you hand over your guns and your gold, then what defenses do you have left? 

25

Thanks for this great article. My only comment is that I think you may be underestimating the potential of alternative energy sources and technologies to help alleviate this situation. I agree that the time frame ncecessary to bring these alternatives to a scale large enough to affect peak oil in the next 10-15 years is not feasible, but I think that in the 15 year horizon and beyond, it is. I think this will be possible because of three factors. Firstly, as conventional energy becomes more expensive, there will emerge even more incentive to develop alternative energy systems (I’m considering mostly transportation here). Secondly, once these technologies reach some degree of mainstream adoption, they will develop and improve at an exponential rate, similar to all other new technologies that come to market like iPhones, but much much faster due to the money driving it. Third;y, the economics of these alternative technologies is already significantly better than oil, the problem is that they have been kept off the market for so long and have not enjoyed the benefits that mass production can do to bring down costs and make things competitive.
It is feasible that aviation, cargo ships, long haul trucking, and plastics manufacturing could use biofuels as an alternative feedstock. This would require altering those technolgoes to some degree to accept the different fuel types, but its possible. Its all relative to the prospect of running out of oil I guess… The question is, can the agricultural and alcohol infrastructure be ramped up fast enough to accommodate thisÉ I don`t kknow, but I imagine market pressures will help speed this along fairly quickly.

Electric cars cost $25 a month to charge and that wont change much with the price of oil. How much do regular cars cost, like $150É If oil doubles then thats $300 a month. The extra electricity generation capacity necessary to switch over most of the vehicle fleet to electric cars is minimal. The capabilities of the new batteries coming out next year are so impressive that all of the preconcieved notions of the limitations of electric cars will be moot. And the prospects for future advancements are even more promising given the trillion dollar auto market as an incentive. I predict a massive shift in the automotive market over the next 10 years, as consumers flatly reject gasoline powered cars in favour of electrics. Why would anyone buy a gsoline powered car in the face of peak oil and rising gasoline prices, when electric cars are better in virtually every single way and cost 10 X less to operateÉ

The other technology of note is home heating using natural gas. Heat pumps are half as expensive to operate as natural gas furnaces right now, and this disparity will only increase as natural gas prices rise. Heat pumps use electricity (4 X less than an electric heater for the same amount of heating) so this would require some more electrical generation capacity. But people will be naturally switching over to this technology and isn`t too difficult to swap your furnace with a heat pump.

These are just some observations, in case you are looking to invest to take advantage of these trends (like, lithium for electric car batteries – it will become the new oil)

26

When peak oil reality (or hype) goes mainstream I’m thinking there may be significant interest in alternative energy companies, as the prevailing belief at first will be to keep maintaining business as usual.  There may be an energy tech bubble similar to the dot com bubble, as everyone trys to guess what will be the breakthrough technology that saves us.  One speaker I heard recently suggested the biggest success will be if someone figures out Storage - how to store energy from intermittent source like solar, wind, tides, etc.  I don’t think the odds are great that technology will “save us” though, and certainly won’t put all my eggs in that basket of wishful thinking.

27

Well written.  I agree with almost everything.
I would respectfully suggest that “Peak Cheap OIl” at $147/bbl is what caused the first domino to fall, creating this current recession.

Energy inflation made it so people had to choose to fill their gas tank, or save for their mortgage payment at the end of the month.  No gas, no car, no job, no income, no mortgage, so they voted to fill the tank, and worry about the mortgage payment later.  Later never came, defaults started to happen everywhere as the contagin was already spread everywhere as all costs of living are directly & indirectly affected by energy prices.

While the energy prices are what struck a match, unfortunately the banks, Wall Street, & FedReserve had been storing gunpowder, gasoline, and nitro glycerine in everybody’s home basement.  Everything blew with a single match lit in thousands of basements.  So here we are today.

28

Excellent Erik,  thank you.

29

Thanks Eric for a very well written article. You have added a new dimension to the unfolding of our predicament and it is easily understandable.
Coop

30

What a great post, Erik. There’s always a curve ball that may come out of nowhere, (unless you’re part of this site).
Yes, I remember the 70’s and crusing with some buddies up from San Diego to San Luis Obispo to watch a friend play basketball in the high school playoffs. We were about half way when we had to stop for gas. The line was at least an hour, and it felt like you hit the jackpot when you finally filled your tank. I think we paid .48 a gallon and that seemed pretty steep.

But looking at the bright side, we had Crosby, Stills, and Nash, Deep Purple, Emerson, Lake and Palmer, etc. to keep our spirits high.

Not looking forward to the lines, but I could use more time with good friends and good music.

Larry

31
These are just some observations, in case you are looking to invest to take advantage of these trends (like, lithium for electric car batteries -- it will become the new oil)
        Although lithium will play some role in the future, mainly to make batteries, it will not be the new oil and until Jurassic Park becomes a reality nothing else will either. Try making some of these from lithium. This list is from http://www.geography-site.co.uk/pages/citizenship/oil_products.html .

                                                                       50 Things Made From Oil

Petrol for cars
Diesel for cars, lorries and ships
Aviation fuel for planes
Credit cards
Plastic bags
Hair brushes
Anti-freeze
Motorcycle Helmets
Carpets
Telephones
Brake fluid
Boats
Glue
Toilet Seats
Shampoo
Household paint
Detergent
Bowls
Fertiliser
Explosives
Car tyres
Artificial turf
Football boots
Lipstick
Weed killer
Parachutes
Umbrellas
Food wrappers
Shower curtains
Waterproof coats
Artifical limbs
Roads
Bubble wrap
Drinks bottles
Toothbrushes
Life jackets
Fishing line
Tennis rackets
Roller blades
Eye glasses
Lunch boxes
Flower pots
Toys
Car seats
Insulation
Nail polish
Hair spray
Medicines
Insect repellant
Golf balls
32

Erik,
Thanks for your detailed explanation. Super read!

If we consider the points you brought up in regards to peak oil (price controls, oil resource nationalization and war casulaty costs, market force vs military force and punishing those evil speculators) - and we relate it to the way the current financial crisis has been diagnosed and is being attempted to be “solved” - I think that before or as oil shocks appear, there will be misdiagnosing of the situation, so that proper solutions are not implemented.

For example, as the oil price runs up, there may be some failure in the banking system (due to large speculative positions taken by banks), - much like what we experienced in Sept 2008 - which then ripples through the economy, but which masks the true cause of the oil price run up. The problem will then be blamed on speculators, rather than on peak oil. For example, I envision that the government may then increase spending on the military to protect and increase the control of world oil supplies, and thus starve China and India of oil. We already see western nations (not just the US) - with military bases in the Middle East.

As you mention Erik - no one can know exactly how this will play out. But government intervention in the market is going to make it difficult to diagnose the problem, and thus proper identification of a effective solution.

John

33

This question was posted in the “other thread”, i.e. before Chris Martenson moved this article to the main blog:

[quote=crash_watcher]

Re: Why Peak Oil Will Never Lead To $500/bbl Crude Oil
Eric,

I wonder if you similarly believe that gold will never be allowed to reach $5,000/oz or $20,000/oz without some government interference and controls, or, even a return of something like the Gold Reserve Act of 1934 or Exec Order 6102?

There are plenty of pundits predicting such high prices for gold, and even higher.

In other words, is there a price tipping point where the U.S. government (or other govrnments) will succumb to the temptation to confiscate gold, or, make it a criminal offense for U.S. citizens to own or trade gold?

In my opinion, this probably would not happen unless the dollar was rapidly losing value, and, the government felt the imperative to issue a new fiat currency backed by gold. Hmmm…that could happen, couldn’t it?

I’d be interested to hear your take…perhaps there simply is no investment that offers one a means of escaping from the coming loss of wealth.[/quote]

I think about this quite a lot, actually. I think that oil and gold are two completely different stories, but there are some similarities.

All of us who advocate investing in physical gold bullion would do well to occasionally remind ourselves that the whole rationale for our investment (most of us anyway) is that throughout history, when paper currencies have failed, it was always gold, because of its inherent scarcity, that took over as the “hard currency” store of value mechanism after fiat currencies failed. So that’s how it’s always been, and how it’s always been in the past is certainly something worth taking seriously. But past performance is not necessarily an indication of future results!

Society doesn’t really need gold. It’s nice for jewelery and for making certain electronic parts, and a few other industrial applications. But based on these needs alone, gold is already way over-priced. The reason many of us think gold will get much more expensive in coming years is that we assume that as with the past, when paper currencies fail, society will revert to what is in scarce supply (gold) as its currency and store of value. But society needs energy in order to function a lot more than it needs gold.

But just as paper money is “fiat”, in a certain way so is gold. Fiat means it has value just because the government says it does, i.e. paper money. Gold is “fiat” in the sense that collectively, everyone seems to agree that because gold is scarce, it should be the thing to serve as “real money” or a store of value. But if that collective viewpoint changed and everyone viewed gold as something that has value for jewelery and electronic parts only, then the price would collapse!

There is no doubt in my mind that oil would replace gold as the de facto store of value when paper currencies fail, if you could fit a million dollars worth of oil in a safe deposit box and store it indefinitely. But you can’t. So the only way oil could ever become “money” is if paper currency were backed by oil stored in a tank somewhere, the way banknotes used to be backed by gold in a vault. If paper currencies are collapsing, I doubt the population at large would feel inclined to trust the government to issue a “new kind” of paper money.

But my real point here is that the only reason to expect gold to appreciate markedly is that because it’s always been true in the past, everyone will accept gold’s scarcity as an implicit reason to consider it valuable.

To the question of government intervention in the gold market, it’s happened before (1933) and could happen again. But I think the odds are actually lower this time. In '33, gold was still money (gold standard) and the only way to achieve the intentional debasement of the currency was to confiscate all the gold. Today you don’t need to confiscate gold to debase the currency. All it takes is a few mouse clicks.

Government will intervene to affect outcomes it wants. In the case of oil, government will intervene to make sure “we get as much as we need at a reasonable price”, and if that stops working because there isn’t enough to go around, I expect the Military to be used to inform the other countries that “we come first, like it or not”.

I certainly wouldn’t “put it past” the US Gov’t to intervene in the gold market. But why? I suppose the reason would be that if the USD is collapsing and headed for zero, but privately held gold is still perceived as valuable and to have purchasing power, the government might deem it “necessary” to confiscate all the privately held gold for its own use. That’s why if I still lived in the USA, I’d keep my gold elsewhere.

Erik

34

This echoes my thoughts as well… we will have to think of all the ways ‘the rules’ can and will be changed, whether it’s oil, gold, 401k’s, where we can spend money, what can we spend our money on, etc.  If there is only one thing I would add to Erik’s excellent piece (though he touches on it a bit when mentioning how complex the politics and economics will likely be), it would be to just take it a bit further and ask people to consider how far any given oil-hungry government’s reach and influence extends and plan your investments accordingly.  We are likely to see a wide range of different investing rules depending on which nation one operates in, and price controls or nationalizations in one country are likely to create opportunities in others.   

Of course ‘changing the rules’ is likely to affect so much more than our investments.  If I decide to start up a business based on alternative energy, I could see my business fail despite huge demand for my product due to rules changes.  Maybe there will be a ‘Making Alternative Energy Affordable’ bill that will enforce price controls on my product or maybe a “Alternative Energy Agency” that will regulate my business to death because I don’t have the money to buy a Congressman…er… I mean hire a lobbyist like the big boys do.  Heck, maybe even having my business nationalized if the situation becomes dire enough.  Whether it’s investing or running a business or simply how one commutes to work, it’s always nice to have a contingency plan in place anticipating changes in the operating environment…

  • Nick
35

Eric,
 

 

Enjoyed reading your thoughts.

When Peak Oil hits (along with Peak water and Peak everything else) I imagine governments will go into “national emergency” mode whereby emegency powers will be introduced. Things like rationing, price controls, increasing tariffs, compulsory purchacing of strategic resources etc will be required to hold countries together. Countries could effectively be on a “war footing” where governments can control/ take what they feel fit for the national good. In short, when things get that bad everything is up for grabs;  Oil, gold land, property etc,

 

Mike

36

Erik
Your post is incredibly sophisticated and a very generous use of your time, it is awesome,  thank you! 

Mish just posted an article on taxation of gold and oil resources today (he thinks both are a given) , one more reason to store gold offshore but then there are significant taxation issues there too!

Denise

37

" investment strategies on initial price run-up"…sounds to me like Nero playing his fiddle as Rome burns. Make lots of money and spend it on what…guns and amunition to protect your fortune…wake up guys…its not a little bump and then continue with business as usual…we need some real in-depth useful thinking on post-petrolium strategies !!! Not this shallow “whats in it for me” stuff.

38

Isn’t the USD an oil derivative already? I thought Kissinger required that all Middle East oil transactions be carried out in USDs. Is this no longer the case?

39

I don’t know if it was Kissinger (I thought it went much further back than that), but I do remember learning the US striked a deal with Saudi Arabia to only accept dollars.  I agree this results in there always being demand for dollars in the global marketplace.  However, that does not really mean dollars are “backed” by oil.  In order to be truly “backed”, there would have to be a fixed quantity of oil that each dollar is worth, and the price of oil of course as we all know, floats.

40

This is the typical Wallstreet mentality. I guess we should add the following disclaimer:

While I do not believe such behavior is either ethical or moral, the system in which we operate demands that I set aside those pesky issues and grab a chunk of the carcass while it’s available.

 

" Peak Cheap Oil drives cycles of endemic cost-push inflation that will require a complete retooling of the entire global monetary and credit system to prevent geopolitically dangerous stresses between net oil consuming countries. Energy commodity payments are made globally with the same currency as other economic activities. As cheaply accessible oil supplies diminish along with dollar hegemony, we will experience cycles of inflation and credit bust until the system is revamped. 
At some point in the future, perhaps as soon as 2011, I expect an echo of 2007 and 2008 when oil prices increased to $147 and food riots occurred in several third world countries as commodity cost-push inflation followed high oil prices through the supply chain. The next high oil price cycle will later be followed by another economic crash through the credit system.
Governments of oil producers will exacerbate the Peak Cheap Oil crisis by attempting to extract more cash from domestic oil production via taxation and nationalization, discouraging exploration and thus putting additional stress on supplies. Central banks may attempt to manage Peak Cheap Oil using policies that reduce the credit money supply that finances energy-related economic activity. They will do this using similar methods that produced asset price inflation in the FIRE Economy, through credit money policies separate from goods and services inflation and wage inflation in the Producer/Consumer Economy, but with the opposite objective: to manage energy prices down, versus real estate prices up. The recent move by the U.S. Commodity Futures Trading Commission to restrict “speculative oil trading” is the leading edge of this development."

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