Relationship of oil, stocks leads to ugly truths
The question is whether $40 a barrel oil is or isn't a transitory peak. My view is that it's the new reality. The era of cheap oil is over. As outlined in The Coming Generational Storm (MIT Press, $28), my money is where my mouth is: I've invested in energy stocks as a substitute for dollar-based investments. Here's why:
Ugly Reality No. 1. We love unlimited energy, but we don't want to do anything to get it. Our capacity to deliver and refine oil is inadequate. We either have not invested enough or have not been allowed to invest enough. The most visible current example is Massachusetts. They don't want wind farms off Cape Cod. They don't want increased liquefied natural gas capacity, either. But they still expect heat and light.
Ugly Reality No. 2. The Middle East remains the largest pool of oil reserves in the world. That's bad news. There are promising areas for exploration elsewhere, but it is unlikely that any new find will rival the fields in Saudi Arabia. Meanwhile, global demand continues to increase. The supply-demand balance is likely to be a source of instability for the foreseeable future.
Ugly Reality No. 3. There are disturbing signs that Hubbert's Peak is arriving as predicted. Using the techniques of geologist M. King Hubbert, who predicted in the 1950s that domestic oil production would peak in 1970, others have predicted global production would peak in this decade. Today, with production declines in some important oil fields, the idea is attracting more attention.