It seems you have JavaScript disabled.

Ummm.. Yeah... I'm going to have to ask you to turn Javascript back on... Yeah... Thanks.

Where Did All The “Peak Oil” Believers Go? at Trader’s Narrative

Crude oil is down more than 50% from its high of $147 a barrel. Where are the peak oil believers? the breathless analysts and cheerleaders of the commodity that warned of a Mad Max armageddon?

long term crude oil support broken

Physical peak oil, which I have no reason to accept as a valid statement either on theoretical, scientific or ideological grounds, would be insensitive to prices. …In fact the whole hypothesis of peak oil – which is that there is a certain amount of oil in the ground, consumed at a certain rate, and then it’s finished – does not react to anything…. (Climate change) is likely to be more of a natural limit than all these peak oil theories combined. … Peak oil has been predicted for 150 years. It has never happened, and it will stay this way.
Dr. Rühl, chief economist of BP

economist cover drowning in oilLast Friday, for the first time in two years, OPEC supposedly cut their production by 1.5 million barrels a day. I say supposedly because these agreements don’t mean much when the member countries are facing the same financial crisis. OPEC members are notorious for cheating on their quotes. So it is difficult to give them the benefit of the doubt today when they are in desperate need of cash from the only thing propping up their economy.

Here is an interesting chart showing the history of OPEC changes in supply. In recessions, when there is less demand for oil, price cuts or better put, announced price cuts, don’t have the same effect.

A walk down contrarian lane brings us to the The Economist cover from March 6, 1999 (see above). At the time oil was trading around $14 and thought by many to only be able to go lower. What we saw recently sentiment wise was the opposite of this where “peak oil” came to be bandied about incessantly in the media and taken as gospel to imply that oil could only go up.

Oily Bubble
Crude oil’s bubble like march higher was rationalized by two main proponents, Goldman Sach’s Arjun Murti and Mathew Simmons. Simmons argued for 150 year old peak oil rationale for a spike while Murti made headlines in May 2006 by predicting a “super spike” taking us to $200 a barrel oil.

Murti has since cut his targets repeatedly as oil has crashed through them. First $140, then $110, then $75 and most recently in a bold attempt to get ahead of the price, $50 a barrel.

Although Murti may not have intended his analysis to get so much publicity, it did and a lot of people came to believe that oil was somehow destined to continue higher. Thus proving once again that listening to “experts” can be dangerous to your financial health.

The charts however were telling another tale to anyone who cared to listen to their whisperings. Crude oil had all the characteristics of a bubble and it has imploded like one too. Looking a long term chart, you can see that it has easily sliced through long term up trend line.

If we are going to go through a deflationary period, then OPEC countries are in for a world of hurt because the demand curve has shifted. If they lower production, they hurt themselves, if they don’t and keep it steady or cheat by increasing it, they will flood the market with supply.

From a technical point of view, there is strong long term support for crude oil in the $40 area. I have no idea if we will indeed go that low. But if we do, I’d suspect oil to find strong footing in that area.

Here’s a historical chart showing the previous OPEC changes in production:
opec crude oil changes in production graph
Source: Wall Street Journal

Enjoyed this? Don't miss the next one, grab the feed  or 

                               subscribe through email:  

9 Responses to “Where Did All The “Peak Oil” Believers Go?”  

  1. 1 Tyro

    Why don’t you tell us exactly what has changed to invalidate the Peak Oil Hypothesis.

    Have we discovered some new source of oil? Are reservoirs being refilled? Please tell me, I’m dying to know.

    As for the BP dude, “Peak oil has been predicted for 150 years. It has never happened, and it will stay this way.” Riiiight, very convincing. Oil peaked in the US as Hubbert predicted but because of a recession and dropping demand the peak was pushed out several years. Did this in any way invalidate the US oil peak? If this guy is not willing to acknowledge the US oil peak, this guy has taken himself firmly outside of the reality-based community.

    Why is it that when oil prices were going up all of the Peak Deniers would always talk about overreactions and say how the future will change, but now that all commodities and stock prices have been crushed (yes, including oil) you act like the prices are set in stone for all eternity?

    It would sure be nice to think that the falling oil prices will change everything but I don’t see anything that has changed to affect the Peak Hypothesis. Dates of the peak are hard to predict and will vary depending on demand and economic conditions, so that’s a debate worth having but what evidence could you possibly be looking at to imagine that Peak Oil is false? Tell me you look at more than just the current price of oil, especially when you were so quick to ignore oil prices six months ago.

  2. 2 Babak

    Tyro, nothing has changed, that’s the point. crude oil remains, like every other commodity - yes, including gold - to be just that, a commodity that goes up and down and sometimes goes into bubbles. when the age of oil ends, we will move on to the next source(s) of energy as we have over and over throughout civilization. there is no reason to believe that this transition will cause oil prices to go up without stop. I don’t deny that oil is a finite resource, what I question is the corollary of this fact.

    btw, I wasn’t ignoring oil, in June I wrote about it walking and quacking like a bubble.

  3. 3 BJako

    Nice article. I was and still am largely a peak oil ‘observer’. With slumping demand due to the financial crisis certainly the imminent threat of a Peak would appear to have been pushed into the future. How far will depend on the demand side.

    The question of moving onto a replacement fuel source requires so much work to be done globally it is hard to imagine such a concerted effort being mounted.

    Atleast the ‘pressure’ seems to be off the peak oil date, where a rampaging world economy appeared to be ramping consumption beyond supply capacity.

    All has now changed. I don’t think the theory has gone away just the date has been pushed back. Hopefully some breathing room for the next fuel source.

  4. 4 Anthony

    Peak production does not mean peak prices - as other readers commented - prices fluctuate. The most recent fluctuation was intensified by people who suddenly believe that commodities are investment vehicles. Aside from gold, silver and platinum I don’t buy it.

    Ft leaked the IEA report that is going out next week. Non opec production declined by 6.5. With overall existing wells declining 9%. Russia and China were the cause of the 1999 drop in oil prices - the only major new producer along with Angola (now in Opec).

    The speculative peaks I believe are bad for the economy and bad for the oil producers.

  5. 5 Tyro

    Oil is a commodity yes, but it is in fixed supply. Whether we move to another source of energy or not doesn’t change the fact that oil will peak. This is a fact. We may debate the date at which oil will peak, but peak it must. Falling prices due to dropping demand and recessionary fears doesn’t change anything, I don’t know why you act as if it will.

    “when the age of oil ends, we will move on to the next source(s) of energy as we have over and over throughout civilization. there is no reason to believe that this transition will cause oil prices to go up without stop. I don’t deny that oil is a finite resource, what I question is the corollary of this fact.”

    When the age of oil ends, and it must (because it will peak!), something else will come along. I don’t know if it will come along in time to prevent economic or climactic disaster but if society continues, it will require some energy supply.

    Unlike gold, oil is a supply of energy and energy is absolutely essential for modern civilization. Oil is also a limited, non-renewable resource. This means that the price of oil will increase over the long term unless something reduces demand. We’ve seen economic recessions can drop demand (as we saw in the 70s) but as long as we consume oil and the supplies become harder to extract, prices will increase. This isn’t directly related to Peak Oil, just supply & demand. As we both know, the current price of any commodity is subject to a lot of variables. It’s as foolish to say that just because oil prices have dropped this year that they will stay down as it is to say that stock indicies cannot have an upward bias because they have drawdowns.

    Anyway, yet again you confuse the Mad Max/Kunstleresque doom & gloom with Peak Oil. Peak Oil is a fact and nothing you say here or in the past offers anything which could change that. The impact on society is something that remains unknown. The exact date that oil peaks is unknown. The price of oil next month or next year is also unknown. Be careful that you don’t confuse them.

  6. 6 Chuck T

    We have not gone anywhere.

    We need hard numbers about “demand destruction”. I have seen nothing yet except some numbers that US driving miles declined 9% in August. Impressive, but enough to drive prices down 50% - I don’t think so.

    Demand may fray at the margins, but the world will still burn about 30 billion barrels in 2009 and existing supply will decline by somewhere between 4 and 9% depending on who you believe.

    This does not include delayed supply because of project slowdown and cancellations.

    Also, expect serious geopolitical problems if oil goes much lower. The Iraq was has strengthened Iran far greater than most realize. In fact there was a buried article in the financial times yesterday about a delegation from the United Arab Emirates going to Tehran.

    The UAE knows that with large Shi’a populations in their countries and around them, they are vulnerable to Iranian pressure.

    The trap is set. Don’t sell good oil or oil services stocks. You will be disappointed.

  7. 7 James - Forex Trading Blog

    Analysts are a complete joke in my opinion. A few months ago a lot of them were predicting that the oil price would go to $200. Now a lot of these same analysts are predicting $50 per barrel.

    I personally think is an excellent opportunity to pick up some bargain oil and mining shares and tuck them away for a few years.

  8. 8 patrick

    This article doesn’t address basic physical grounds of oil as a non-renewable comodity and just speculates on funancial bubbles and other sience-sound-like material.

    Putting it simple the autor just say to us “Guy’s we have seen funancial bubbles - thats just another one” like oil market is the same thing as housing market

  1. 1 Six Years Flat: The Story of non-OPEC Production |

Leave a Reply