Editor’s Note: Oil expert Matt Badiali tackles the claim by peak oil guru Dr. Robert Hirsch that we are looking at $500 oil in the next three years.

Matt says Hirsch is a nut who is ignoring demand and only looking at supply.

Recent developments support both sides of the argument.

Today’s Financial Times reports that “oil prices dropped sharply yesterday as traders reacted negatively to evidence that record retail petrol prices above $4 a gallon were damaging demand in the US.”

AP reports that oil prices have soared “after the president of OPEC, Algerian Energy Minister Chakib Khelil, said crude could hit a record 170 dollars this year owing to a weak US currency and geopolitical unrest.”

Oil prices are currently up above $137 on the Nymex.

Commodity Q&A: $500 Oil

by Matt Badiali

Q: I heard someone on CNBC call for $500 oil in three years? Do you think prices will go that high? – N.B.

A: Dr. Robert Hirsch is the Senior Energy Advisor at Management Information Services, an economic and energy research firm. He’s a peak oil guru.

And frankly, I think he’s a nut.

When he was on CNBC, he was “talking his book,” calling for huge price increases in oil. But Hirsch made a mistake common among scientists: He fell in love with his theory and forgot his basic principles.

Now, Hirsch probably forgot more about economics than I’ll ever know. However, I think when he predicts oil at $500 a barrel, he’s ignoring demand and only looking at supply.

If you think supply is inadequate, like Hirsch, then you extrapolate nightmare scenarios of skyrocketing prices. To strengthen his argument, Hirsch adds growing populations around the world and claims that they will also compete for oil.

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But think about what $500 oil by 2011 would mean – gasoline at $12 to $15 a gallon… not to mention jet fuel, diesel, and so on. Cars would sit idle in driveways. We couldn’t afford to ship packages or buy produce from outside our own zip code.

Hirsch ignores the basic fact that demand must fall off long before oil hits $500.

Let’s look at a simple statistic: Drivers consume more than 60% of all the oil used in the U.S. That demand can be cut… radically. Take my parents, for example. They work about four blocks apart… but take separate cars. That’s an easy fix if gas prices go nuts.

And the Energy Information Administration (EIA), a division of the Department of Energy, thinks the U.S. population is already making those choices. It predicts U.S. petroleum consumption will fall by 440,000 barrels per day over the next year.

That’s only a fall of 2.1% in 2008. But the EIA originally predicted a fall of less than half that. I expect the actual decrease will be larger than even this estimate.

Same thing goes for demand in China. The government just cut its oil subsidy. Guess what? Demand is going down.

Dr. Hirsch needs to rethink his theory.

Source: Commodity Q&A: $500 Oil