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The theory that the world will run out of oil has been around at least since the 1880s. The prophets of oil dystopia have been proven to be wrong every single time for essentially the same reason that their Malthusian intellectual forbearers were wrong: The resourcefulness of human beings in a civilized context tends to expand the frontiers of what was previously thought possible. The theory of Peak Oil essentially rests on the assumption that “this time will be different.” It rests on the assumption that technology will not enable the expansion of recoverable reserves and production (supply). And it rests on the assumption that technology will not enable efficiencies in consumption (demand). Peak oil also requires the assumption that technology will not enable the development of competitive substitutes.

These are very tall assumptions. For this reason, any investment thesis premised on the theory of Peak Oil is necessarily highly speculative _SeekingAlpha

Peak oil, as typically practised, is more of a religion than a scientific theory. It is relatively harmless as such, unless persons invest large sums of their own or other people’s money, based upon the idea that oil prices will monotonically increase. In the great commodities crash of 2008, a lot of true believers lost money — for themselves and for a lot of other people.

In 2008, even the most elementary cyclical analysis indicated that oil and oil stocks were a screaming sell. However, blinded by peak oil ideology, traders and investors continued to drive the price of oil and oil stocks higher long after it was clear that the bottom was falling out from under the global economy.

In 2008, oil and oil stocks were like internet stocks in 1999 – they could only go up. Skeptics were told they did not understand. “This time it’s different,” they said, “this is the new economy.” All such talk tends to end badly, does it not? _SA

And yet the true believers cannot escape their inner conviction that something will force energy prices upward into the range of unsustainability. For this cycle of true belief, the “cause” of the next run of “monotonic price increases” will be the exponential increase of demand from the BRICs — especially China (and India).

China’s economy has been sustaining high growth rates in the past few years based on an unsustainable expansion of private sector and local government debt. The rapid expansion of debt-led investment growth has led to mal-investments in many areas. There are clear signs that these mal-investments have already begun to create problems for entrepreneurs, local governments and the banks that financed them. 

China’s economy is highly export-dependent. A slowdown in the export sector of the economy could trigger an unwinding of various accumulated mal investments in the domestic economy. In theory, this could lead to a prototypical recession. _SA

It is unclear how long China’s CCP can hold its house of cards together, and prevent a breakup of the current empire. China’s empires have always tended to rise and fall in cycles, and the modern “communist empire” is not immune from historical and economic forces.

Certainly China’s (and all the BRIC’s) export markets are having a difficult time economically. This bodes ill for the future of these so-called “emerging markets.”

All signs point clearly to a severe slowdown in global economic growth. Despite this, the price of oil is incongruously hanging around the $85 level.

This can only be explained by the fact that Peak Oil theory is again serving as a distraction in oil markets just as it did in 2008. However, just as in 2008, all the speculation about shortages ten years from now will not matter if global demand declines and the market becomes oversupplied in the present. _SA

Peak oil believers appear to be very slow learners. Not that they are mentally retarded. Rather, their faith is strong, and will not be contradicted by heretical ideas. They will burn the books and crucify the heretics, rather than to re-examine their own shaky assumptions.

Reality will have the last say, to the chagrine of the true believers.


Al Fin Energy blog, 23 September 2011