Oil shocks and oil peaks

Wikileaks and oil peaks. Not a completely surprising combination and this article is a nice read. But, it’s been clear for a long while that the oil market does not have much excess capacity and resource estimates are notoriously uncertain and often exaggerated for political or economic gains.

Peak oil is simply expected, and could arrive sooner than we imagine. Non-OPEC crude oil production has declined since early 2005, despite record-high oil prices. And the shift to unconventional substitutes—a symptom of peak oil, rather than an argument against it—is well underway. These substitutes, such as tar sands, are not an easy substitute for crude oil, as they are hugely capital and energy intensive. One wonders whether energy providers would go to such lengths to fill our gas tanks if peak oil were only a myth.

Both supply and demand for oil are relatively inelastic (that is, they do not respond readily to prices), causing the price of gasoline to rise and fall more rapidly than our other regular purchases. Even small shortfalls in crude oil supply can cause significant price increases. Therefore, when spare capacity is tight, real-world events in far off places can have huge impacts on our economy. This has been observed numerous times in recent decades, and the effect has been worsened in recent years by stagnating production from existing conventional oil fields, as was clearly evident in the strong oil price peak in 2008. I will not be surprised at all if a new oil price shock will happen soon.

As another note to this article, the real risk of peak oil isn’t that we’ll run out of fuel – it lies instead in what we will do to avoid running out of fuel. The risk is that we’ll respond with piecemeal solutions that emphasize one aspect of the problem while making others worse.

But, expect a volatile oil price in the next years, with sudden peaks and slow declines in between. It won’t be pretty, but we don’t need wikileaks to point that out to us.

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