Oil prices were down again today and gas prices have dropped below $2 in a lot of states. So whatever happened to the hysteria of the last few years called Peak Oil? Yeah, not so much (from Globe and Mail; HT Carpe Diem):
Mr. Pickens and plenty of other like-minded investors became convinced that oil had nowhere to go but up, even after it passed the $100 threshold. They trotted out all kinds of charts to make their case that demand was so strong, we would never see cheap energy prices again. Peak oil and overwhelming Chinese demand became their twin mantras. Some analysts, ever eager to get in front of a trend, even started talking up $200 oil.
Too bad they weren’t paying attention to a veteran energy economist named Philip Verleger Jr., who insists oil never should have gone much above $70 a barrel; that it did so only because of “a perfect storm” of U.S. policy mistakes, European economic developments and currency shifts; and that it could well end up back in the low $20s before the global economy gets back on its feet.
“I think it will go a good deal lower, particularly next spring [when oil markets are traditionally weakest],” Mr. Verleger said in an interview. “If this thing follows a natural cycle, I think we’ll see something as low as $20 to $25.”
Mr. Verleger, who recently set up shop as a professor of strategy at the University of Calgary’s Haskayne School of Business, has been an adviser to U.S. presidents, as well as big energy producers and consumers. He has testified before Congress, debated with oil hawks and openly challenged their assumptions, which he says are based on a poor understanding of oil economics.
Forget about speculators or even peak oil, which won’t affect prices for decades. The reason oil prices shot so high, in a nutshell, has to do with a boneheaded U.S. decision in August, 2007, to put much more light sweet crude in the Strategic Petroleum Reserve.
This occurred just as European demand for the stuff, which is used to make low-sulphur diesel, was soaring thanks to truck traffic to the new Eastern European members of the EU. Currency issues also came into play, forcing up the dollar price of crude.
So put the surge down to lousy U.S. policy (since reversed) and a combination of market and currency issues.
When anything goes up or down for a sustained period, even smart investors often come to think that there’s only one truth in the market.
Mr. Verleger was at Yale when energy expert Daniel Yergin declared that the second oil shock of 1979 had triggered a permanent change in the characteristics of the market and prices would be heading higher. In 1981, oil was at $35; five years later, it was down to $10.
“There have been lots of statements like that,” Mr. Verleger said. “The problem is that most of the people doing the analysis failed to really understand the market.”
Will speculators now get the credit for driving prices down? I didn’t think so. Will the peak oilers realize the error of their ways? I didn’t think so. Will the politicians back off of throwing money at alternative energy? I didn’t think so. Demonizing speculators, worrying about running out of oil and funding dubious alternative energy projects was never about oil prices. All of the people arguing for those things had a different agenda and now that oil is falling their agenda hasn’t changed.