Those quick to deride peak oil theory also don't know Jack
By Barrie McKenna
A chronic pitfall for economists is that the daily deluge of data often obscures more meaningful long-term trends.
Even months of data can seductively point to a conclusion that doesn't stand the test of time.
It's that old adage of not seeing the forest for the trees.
Consider oil. The flavour of the month is to dump on the peak oil thesis -- that world oil production has maxed out and is condemned to fall.
As the price of crude climbed ever higher last year, peak oil was all the rage. The conventional thinking then was that we were condemned to paying high prices because the world isn't finding adequate new supplies of oil and gas to meet burgeoning demand -- in Asia, North America and elsewhere.
In the past few weeks, as the price of oil has plunged more than 20 per cent from July's record high of more than $78 (U.S.) a barrel, economists have begun to second-guess and even joke about what last year was considered sound analysis.
On Friday, BMO Nesbitt Burns issued a report about the implications of cheaper oil titled Trough Oil Theory. After Chevron announced its recent big Jack 2 oil discovery in the Gulf of Mexico, The Globe and Mail's headline the next day was: "Peak oil theorists don't know Jack."
With oil now in the low $60 range, many economists are rethinking their assumptions of last year.
They are second-guessing the potential of Alberta's oil sands. The Prius and other fuel-efficient technologies may be just passing fads. And the world may go on guzzling like there is no tomorrow because oil will always be cheap and abundant.
The problem in all this is that the peak oil theory isn't about $78-a-barrel oil. And the price of abundance isn't necessarily $63.
The factors that pulled oil futures prices from $78 to $63 are short-term realities in a very long cycle. The forecasted hurricanes never came. Chevron hit pay dirt. Iranian President Mahmoud Ahmadinejad was suddenly sounding less like Dr. Strangelove on his nuclear intentions. Members of the Organization of the Petroleum Exporting Countries met in Vienna and said they won't lower production quotas.
BP said its leaky pipes in Prudhoe Bay might be on-stream earlier than first thought. The global economy looked to be on a downward slope, taking a bite out of demand.
Perhaps most importantly, oil follows seasonal patterns. And without a major hurricane, U.S. oil demand typically shrinks at this time of year because the summer driving season is over and the winter heating season is still months away.
All these things are really just trees, obscuring the view of the horizon. Don't let them trick you into thinking the landscape has fundamentally changed since mid-August.
If the past couple of years have taught us anything it is that oil prices are volatile and prone to speculation. They are "futures," after all. The typically quoted daily price of oil is actually a prediction of where the price will be a month from now.
Long-term futures prices of oil remain significantly higher. Futures prices for most of 2007 and 2008 suggest crude will stay near $70 a barrel.
And don't forget that even at $63, oil is twice as expensive as it was last year when the OPEC cartel raised its production to current levels. It's also twice as pricey as it was just three years ago.
A short-term reprieve would have important economic effects. Cheaper oil puts more money into consumers' pockets.
But it is the horizon that we should all stay focused on. The world's big oil fields are fewer and far between, and much more costly to locate and exploit. Many of the key producing regions remain geopolitical danger zones -- Iraq, Iran, Saudi Arabia, Nigeria, Russia and Venezuela. On the demand side, the rise of China and India as huge consumers is not a passing phenomenon. Likewise, the move to greater energy efficiency and alternative fuels won't happen overnight, even in the developed world.
So if you look carefully through the undergrowth, the peak is still there. Oil will be an increasingly scarce, and expensive, commodity.