Saturday, September 15, 2007 1 comments ++[ CLICK TO COMMENT ]++

Dissenting Opinion of Peak Oil

Someone posted a reference to a news story mentioning potential catastrophic effects of Peak Oil on the Morningstar message board that I post on. I thought I would post my response to Peak Oil.

As someone who doesn't subscribe to the theory of Peak Oil, let me offer my dissenting views.

First of all, it is possible for oil prices to go up even without Peak Oil if the US$ declines substantially (I don't think it will happen but some are expecting the US$ to decline a lot more). For the sake of argument, let's assume these people are predicting $200 oil based on present value and not based on substantial US$ decline. Anyway...

As I have been saying for a while now. a lot of the Peak Oil theory is based on high growth rates in developing countries, along with pretty good growth in developed countries. This rarely lasts for long. Investors, economists, and policymakers love to project the present far into the future but it never turns out that way. It wasn't too long ago, 1997 in fact, when the Asian Tigers (South Korea, Taiwan, Malaysia, Singapore, Indonesia) that were supposed to be the next big thing and continue to grow rapidly ran into big problems. Oil, if you recall, hit its bottom (in nominal terms) in 1998 with the fall of the Asian Tigers.

Right now, people are projecting 8%+ growth rates in China and India, along with fairly high growth rates in other developing countries, like Brazil, Vietnam, and so forth. I am pretty sure these rates are going to end up being completely wrong. Already China is running into massive pollution problems, not to mention bubbles in stocks, real estate, and manufacturing. If these growth rates end up being lower than forecast, the Peak Oil dates will be delayed. The dates can be delayed by decades even.

Secondly, most Peak Oil theorists ignore basic economics. Namely, demand should go down as prices rise due to scarcity. This is almost a law in economics and I'm not sure why Peak Oil theorists seem to ignore it. So far demand hasn't dropped with rising oil prices because it is not significant enough to impact profitability margins, and hence slow down the economy. It is highly improbable in my opinion to have developing countries, whose businesses tend to have razor-thin profit margins and are highly vulnerable to raw material costs, grow at a high rate if oil prices rise substantially. For instance, many Chinese factories have very thin margins and will go bankrupt or curb production if oil prices are high. The increase in prices will also impact consumers. Right now the higher classes (upper middle-class and higher) still buy fuel-hungry cars such as trucks, SUVs, large cars, and so on. I will guarantee you that if oil prices go up quite a bit, very few will buy those cars. Lower classes will revert to greater use of public transportation if oil prices go up a lot higher.

Lastly, as prices rise, technologies and materials that are competitive to oil will emerge. Similar to how railroads have all of a sudden become cost-competitive with trucking due to high oil prices, I suspect many alternative energy sources will take off. This can range from hybrid automobiles (autos are a big user of oil) to increased use of insulation (insulation can save 40% of a building's energy loss (most are already insulated so the savings will be lower but there will be greater incentive to improve what is already there)).

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1 Response to Dissenting Opinion of Peak Oil

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September 16, 2007 at 6:31 AM

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