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Symptoms of Peak Oil

Enjoy the Cheap Oil While You Still Can

Written by Keith Kohl
Posted October 2, 2007 at 8:00AM

Baltimore, MD—"There are two words that you will never hear again in the same sentence: ‘cheap' and ‘oil.'" I remember saying this more than seven months ago, as oil was trading above $60 a barrel.

But I should confess something. . .

I was completely wrong.

Before you jump the gun with jests and accusations, just hear me out for a minute (because I know many of you will feel the same way). You see, there's a chance I'll be sitting at my desk six months from now reminiscing about how oil used to be so much cheaper in the mid-$70s.

I know oil prices always fall during the winter. Believe me, I thought they'd already be heading lower.

That's not the case, though. I'll let last week's Energy Information Administration (EIA) petroleum report show you what I mean . . .

EIA Chart

For the last four weeks, crude oil spot prices rose significantly. Notice that last week's spot price was $23.59 more than the previous year.

quot;Well, maybe they're going to start heading down now?" you ask.

Possibly, but I wouldn't bet the farm on it. In fact, oil prices are expected to rise above $85 a barrel before the end of 2007 and to over $100 a barrel next year.

It's not good enough for us just to hear somebody say that oil is going to rise. My thirteen-year-old niece could make that prediction. We want to know why we're in trouble.

And we seem to blame the wrong people, too. Just the other day, I was talking about gas prices with my neighbor when the record crude oil price of $83.90 a barrel came up. I was curious as to how he felt. "So what do you think is causing all this?"

"It's those damn big oil companies. Exxon and all them guys are ruining everything, trying to keep prices high to get more of our money," he said matter-of-factly.

Imagine his surprise when I told him that all the "big" oil companies like Exxon control less than 10% of the production. He gave me a curious stare when I mentioned peak oil to him. He had never even heard of it before.

"Well, that'll change soon, because it's going to be an issue as big as global warming within the next couple of years."

Here's the thing: The more we see how tight global supply and demand are getting, the more our minds focus on peak oil.

Peak oil, of course, is the point when global oil production peaks and begins to decline.

Here are the facts: Right now the world is producing roughly 85 million barrels per day (mmbbls/day). And producers are struggling to maintain production from depleting oil fields. My question is: What do you think will happen when we're still producing 85 mmbbls/day in the near future, but consuming 88 mmbbls/day?

Even if production doesn't steeply decline like the peak oil theory claims, but rather plateaus like the International Energy Agency (IEA) suggests, the gap between supply and demand will continue to widen. That'll lead to considerably higher oil prices, well in excess of $100 a barrel.

Not only is oil getting more expensive to extract, but we're also not seeing the same major discoveries we were decades ago. There are no more Ghawars out there, plain and simple.

I believe we'll easily see $90 oil before it drops below $70 a barrel, especially if the EIA's weekly oil report continues to show crude oil stocks dropping. U.S. stocks last week were about four million barrels less than last year.

Savor It Now While You Still Can

I told you I was wrong about oil never being cheap again.

The truth is that oil is incredibly cheap right now compared to what we'll see in the future—which raises the question, "What is the true price of oil?"

In 2002, we all would've agreed that $50 for a barrel of oil would be ridiculous, considering prices were $20 a barrel. A few years later, we would have said that $60 oil would never sustain itself, and prices would soon be back to $30. All of a sudden people are saying that $100 oil is within reason?

What's next?

When we're consuming 97 million barrels per day in 2015 (according to the optimistic EIA estimates) and production is still in its "plateau," will we think $300 for a barrel of oil is cheap?

Let's just enjoy $80 while we can.

Until next time,

keith signature

Keith Kohl


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