Letter From a Level Headed Peak Oiler

Hi Mike,

I'm only a peak oiler in the sense that I think the oil supply will peak and then decline. Even the US government is a peak oiler in that sense. I'm not a geologist, so I do not know when the peak will be. The oil could peak today, or it could peak in 2037, or during the 22nd century. But I thought I would have a go at offering possible answers to your questions. These are only suggestions:

1. If the peak is just around the corner and exceedingly high prices are coming our way, then why are the prices for oil futures and oil call options so low?

(a) Perhaps because the peak is not a sharp point but more like a gentle curve, or even a straight line. All the books which show peak oil diagrams draw the x axis on these diagrams in such a way that everything looks really bunched up. The x axis begins in (say) the 1950s and goes into the 2050s. On such a diagram even a ten year peak looks pretty sharp. But if our diagram covers (say) 2007-2012, instead, then even the sharpest of peaks will look straight. So the oil futures for that sort of period will look straight, too.

(b) Perhaps because the sort of people who get worried about peak oil are not the sort of people who play the futures game. Instead, people who play the futures game tend to be professional speculators and investors. They read US government and EIA reports, which say the oil is OK until the middle of the century. (I will explain this in more detail below, in a possible answer to question 2.)

(c) Perhaps because even the peak oil believers do not agree on when the peak is. Some say the peak has already passed, others say it won't occur until 2015. Some say we won't see the peak until "its in our rear view mirror." This confusion makes the rational buying of futures more difficult.

2. Are you buying oil futures or oil call options? If not, why not?

Assuming that peak oil people are not buying such things (there may be some who are), I can think of three reasons:

(a) Perhaps the sort of people who get worried about peak oil are not the sort of people who like to invest in futures. People who get worried about oil supply, about economic collapse, about social breakdown etc, are people who worry about things in general (by definition). If they bought futures they will only start to worry about those, too. "What if I die before the futures pay off? What if the government nationalises the oil industry, and my options become worthless? What if there's a global financial collapse, and I realise I should have spent the investment on tinned meat instead? What if...??" So, they will not any buy futures.

(b) Perhaps they believe in peak oil collapse so much that they would prefer to spend their money on ammo and tinned food, rather than oil futures. Oil futures might be a free profit, but it's only an incentive if you believe that the global financial system will still exist in 5 years time. If you think that society will have collapsed by then, futures are not much of an incentive at all. Personal survival becomes a stronger incentive. Money spent today on oil futures or oil call options is money which cannot be spent on learning how to trap game or purify water.

(c) Perhaps some people find the idea of making a profit on the oil price morally or ethically unpleasant. The issue some people have with the oil price is that a big rise in the cost of oil will cause massive deprivation, suffering, pain and perhaps even death across society as a whole. Elderly people on meagre pensions will have to choose between starvation or freezing over winter, because they cannot afford to both heat their homes and buy food. Betting on the price of oil is therefore betting on the amount of suffering in the world. I'm not saying that oil future speculation is immoral: but I expect some peak oil believers do believe that, and so they will not personally buy oil futures.

3. Why did peak oil supporters in the 1970s tell us that the oil supply would run out in the 1980s and 1990s? Why were they wrong then? Why are you right now? What's changed?

About the 1970s, not a clue. I wasn't paying attention then. But I can suggest a reason for what might have changed: discovery. During the 1960s and 1970s geologists only had to put on their walking boots or scuba masks to discover new oil fields. But the new fields being discovered these days are smaller, harder to extract, and have lower quality oil. Now I would like to ask you a question: what is causing the price volatility we see in oil price this century? I have heard various explanations from economists, including factors such as East/West tensions, pension funds, growing international demand, speculators, extreme weather events, disruptions caused by accidents to rigs or pipelines etc. But every single one of these factors also existed for most of the 20th century, too, yet the prices stayed stable then. The only factor which caused price problems in C20 was when OPEC turned the taps off. So, given that OPEC's taps have all happily been on in C21, why the recent volatility? What's changed?