Peak Oil is a Myth - High Oil Prices Govern New Exploration and Production

Posted by admin

July 10, 2008

Plenty of credible sources have claimed for decades that oil supply is nearing it’s inevitable end. When I started drinving, I paid $0.91/gallon for gasoline. That incredibly high price was evidence that we had nearly drained the ground of black gold. Decades later, with millions of more barrels being produced daily than back then, the myth persists.

This peak oil myth is based on purposeful ignorance of basic economics. The formula that “Peak Oil” nuts typically use is something like:

Barrels of oil left in today’s oilfields using today’s extraction technology / annual demand = years of oil bliss left

Basically, if we estimate that there are 200 million barrels of oil left in today’s oilfields and the world uses 13 million barrels of oil per year, we have about 15 years left before we’re tapped dry. Anyone interested enough in the subject though is lying by ommission. There is no doubt that the person making that type of assesment about our oil supply is aware that we are constantly developing new drilling technology that allows us to more efficiently and economically extract oil from existing fields and previously inaccessible fields. Also, as supply dwindles and demand increases, oil companies are consistently discovering new oil fields. The very expensive and speculative nature of exploring for new oil fields justifies the windfall profits earned by oil companies being demonized by today’s media, but that is a subject for a different article.

A Peak Oil nut might also make their doomsday prediction even scarier by incorporating population growth and reporting that with that growth oil demand per capita will grow as well. I would argue that all of these precepts are flawed:

It’s possible we will run out of cheap oil, but there are mind boggling lakes of oil in the basement. Whether you are a pessimist or optimist, the world will never put oil on the endagered commodities list.

Let’s run a little scenario - we’re at “Peak Oil”, and supply is running low. When supply dries up and wells run dry, new wells will be drilled that either have a higher cost of extraction. Also, we could see wells run dry and no new wells drilled. Either way, you get higher oil prices. When oil prices rise, demand for oil goes down. Prices are correlated to demand - basic free market economics. It happened with the 80’s oil crises and has never completely recovered. People insulated their homes, auto makers manufactured more efficient vehicles, and OPEC suffered. Prices fell, but people didn’t rush up to the attic to pull their insulation out. Demand had been permanently stunted.

Even a college freshman has learned that with decreasing supply curve comes a correlated decreasing demand curve. Gasoline is a consumer product that with price increases will experience reductions in consumption. Ultimately, prices will be so high that only a small group of consumers will purchase it, with everyone else having moved to an alternative fuel. In this scenario, world demand has slowed to a sip, leaving an ocean of oil that will likely never be tapped.

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