Oil booms and busts have occurred before. A quick look at the history of oil will tell us if any patterns emerge that we can use to predict the future of oil production. Before World War II, oil wasn’t in high demand. In fact, oil in the 1860s was used as anything but fuel. As William Fowler wrote, oil in the 1860s was hailed as “a disinfectant, a vermin killer, hair oil, boot grease, and a cure for kidney stones.” Before World War II, the issue was too much supply . . . After WWII, it was clear that the world would need a lot more oil (History of Oil).
So who came up with the concept of peak oil? What is peak oil, anyway? Geophysicist Dr. M. King Hubbert first introduced the idea of peak oil in In 1956, Hubbert predicted U.S. oil production would peak sometime between 1965 and 1970. At the time everyone laughed at him, but his prediction almost came true. U.S. oil production peaked in 1971, making Hubbert a folk hero (The Second Most Famous Oil Geologist). Peak oil deals with the idea that oil supply is a limited resource. With the world’s population increasing and developing countries industrializing rapidly - especially giants like India and China - it’s just a matter of time before demand outstrips supply, leading to sky-high oil prices. This should cause oil stocks to soar, which would be a boon to investors. But have we reached our peak? According to some experts, peak oil is just a myth. With promising discoveries of oil in the Gulf of Mexico and Alberta’s oil sands, combined with advances in solar power technology, peak oil may not be anything we have to worry about any time soon (The Peak Oil Myth).
No matter when we will start to run out of oil, the fact that it is a finite resource is a given, and one expert says we need to change our ways now. According to Ali Samsam Bakhtiari, a retired “energy expert” formerly employed by National Iranian Oil Company, we need to take five steps to prepare for peak oil: (1) Throughout all previous business-as-usual thinking and rosy senarios; (2) Mercilessly reduce oil consumption; (3) Reuse as much as possible; (4) Recycle as much as possible; and (4) Reward people for such behavior (Prepare for Peak Oil, Says Energy Expert). Tom Whipple, a retired CIA analyst, says that $100 a barrel oil is just a “short-lived, speculative binge” and that soon oil will return to it’s “proper” price of $85 per barrel. Yet it’s funny how the “proper” price keeps rising. No one talks about oil returning to $40, $50, or $60 a barrel anymore. Those in power justify their actions in that they don’t want to cause a widespread panic, which could cause hoarding and market sell-offs, but we need to do something now to let go of our dependency on oil (Peak Oil and the Sands of Time).
Peak oil is of dire importance to all the other markets. Increasing demand plus dwindling supply equals no future growth, which means that investors holding paper markers built on the hope of future expansion of wealth—stocks, bonds, currencies, option contracts, derivative plays, and other certificates traded in open markets—will be left holding nothing but worthless paper (Why Markets Need to Take Peak Oil Seriously).
President Bush attempted to persuade Americans that the higher oil prices are due to Congress not allowing drilling in the Arctic National Wildlife Refuge (ANWR). But according to a study conducted by U.S. Energy Department revealed that oil development in ANWR Alaska would only slightly reduce America’s dependence on imports and would lower oil prices by less than 50 cents a barrel. Even at peak production, the U.S. would still have to import two-thirds of its oil, as opposed to the 70 percent if the refuge’s oil supply remained untapped (ANWR Oil Will Have Little Impact on Oil Prices).
Many experts feel that peak oil really has no effect on oil prices, and by the time it does, we will have alternative energy mechanisms in place to deal with the strain. Right now, we are at a distribution bottleneck, as the untapped oil reserves we have left exist in the form of Colorado oil shale and Canadian oil sands, which we aren’t able to extract effectively at this point. There’s also a lot of environmental, power, and water concerns that any proposed extraction process brings up. Only time will tell if extracting oil from shale will be a viable option for the U.S. (Why Peak Oil Has No Effect on Oil Prices).
Peak Oil in the News: The 4 Most Important Articles for Understanding the Impact of Peak Oil
Russian oil supply is peaking. Most of the Western Siberia oil fields were discovered in the 1950s, 1960s and 1970s (Russia Has Peaked . . . Oil Decline in Siberia).
You can thank Matt Drudge for introducing peak oil to mainstream society. Before that it was glossed over by oil companies who come out with a report every decade that contains the same hopeful outlook: That the world’s oil reserves has enough to keep us running for another 40 years. They dismiss peak oil, saying that if it does come it will just as likely be due to a peak in consumption or restrictive environmental policies as a peak in supply (How Peak Oil Went Mainstream).
Prices don’t lie, especially when it comes to oil. But do we always like what they say? Prices normally rise in periods of high demand in order to clear the market, but part of cause for rising oil prices is the U.S. government creating extra money, which causes inflated prices (Oil Going Up—Where Will This Elevator Stop?).
On the production side, OPEC won’t raise output, and non-OPEC nations can’t. The Saudis have slashed their oil production by 2 million barrels per day over the last three years, while the price of oil has skyrocketed. Meanwhile, the U.S. has cut interest rates, driving down the value of the dollar and threatening war with Iran, which is driving up the “risk premium” in the price of oil. OPEC is slowing down oil production even as prices rise, driving up the price even further. By 2015, their assets will be worth more than the entire U.S. economy and by 2016 they will overtake the European Union. In order for us to profit, we need to watch the to see what investment opportunities are opened up by this turn of events (Arab Oil Wealth To Dwarf U.S. Economy!).
What Will Life Be Like After Peak Oil?
One wonders then, what a future without oil might look like. As far as prices are concerned, look for any decrease in prices to be a mere correction and for prices to remain firm, never again going much lower than their current level (Where Next for Oil?).
So how will we live in this brave new world? Consider this: We travel all over the globe and move freight by means of oil used as fuel and lubricant in cars, trucks and airplanes. We wear oil in the form of synthetic fibers, and make plastic containers from oil. Now think about how all our lives will change when those oil supplies, already peaked in the U.S. and several other countries, starts to run out. It will mean completely changing how we live our lives. The sooner we learn all we can about peak oil now, the better (How Will You Live in a World Without Cheap Oil?).
So what will changing our lives entail? It will mean restoring our passenger rail system, supporting local agriculture, and rebuilding local networks of retail trade and economic interdependency when the Big Box stores die from lack of oil to bring their stock to market, as well as setting legal limits on new suburban sprawl (How The U.S. Can Survive Peak Oil).
Capitalizing on Peak Oil. What Investments Will Help build your Wealth with the Global Decline of Oil Production
Things look grim, but there are ways for the wise investor to profit from this downward shift in oil production. There is still money to be made, primarily in the offshore market. Many deepwater regions of the world hold considerable potential to produce oil, and some significant discoveries could still be out there waiting to be made. The money will be flowing into offshore drilling (Dig Deep for Oil Investment Opportunities).
Alberta, Canada is literally sitting on a potentially major oil supply in the form of oil sands. It is projected that by 2030, it could be pumping out more oil than currently is produced by Iran. Companies with a foothold in Canada’s oil that investors should watch include Royal Dutch Shell, ExxonMobil, Chevron Texaco, as well as Canadian firm Husky Energy Inc (How to Invest in Canada’s Black Gold).
The U.S. presently consumes about 21 million barrels of oil per day. This includes both domestic output and imports. According to the most recent figures from the U.S. Department Of Energy, in January 2008, U.S. crude oil output was just over 5 million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.) Both domestic and foreign output is peaking and declining, while demand for oil both from the U.S. and developing countries is increasing. So when it runs out, we will have no choice but to do without (The U.S. Oil Supply—A Look At Our Future Energy Needs).
In a world of rising oil prices, undervalued oil stocks represent a doubly attractive opportunity; on the one hand to make money out of what appears to be a gross market inefficiency whilst on the other effectively providing compensation against the ravages of a higher oil ‘tax’. Stocks to buy include BP and Royal Dutch Shell in the UK, Total and Repsol in Europe, or Apache and Chevron in the US. (How to Profit from Soaring Oil Prices).
As we’ve noted earlier, exploration by oil companies will continue, especially offshore, an area whose infrastructure is lagging behind demand. Oil companies will continue to spend money on oil field services and equipment companies. So just as in the gold rush, where the people who made money were the ones selling picks and shovels, investors looking to gain should buy stock in the companies supplying equipment to oil companies (Three Reasons Why the Boom in Oil Services Will Continue).
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