Peak Oil December 2008 Update

Those who think it is not happening are in denial...

 There is a real interesting discussion about the recent oil (NYSE:USO), (NYSE:DBO), (NYSE:DXO) price activity of the past year and governments reaction to it.

I highly recommend the ASPO Newsletter

From the December 2008 Issue:

In years ahead, analysts may look back on the current crisis and identify its causes. They may conclude that oil demand had begun to outpace supply around 2005, when the production of Regular Conventional Oil passed its peak.

The shortfall was however relatively small and was partly met without undue difficulty by a modest reduction in demand. But as prices began to firm, oil traders and other speculative financial institutions began to take a position in the market, which had the effect of driving up the price. Gradually the process built momentum as huge notional profits were reaped from the appreciating asset. In a conventional market such movements would soon be countered by increased production, but in the case of oil, there was no spare capacity to release, and the speculative surge fed on itself leading to an extreme escalation in price which reached about $150 a barrel by July 2008.

However as this peak was approached, the traders began to conclude that a limit was close and began to buy future options at lower prices, which began to undermine the price in a self-fulfilling process. In parallel the high prices began to undermine many other aspects of the economy with for example airlines and motor manufacturers facing difficulties. They themselves relied heavily on debt, which itself was traded between banks without adequate genuine collateral, and were forced to unload their speculative oil positions in order to try to shore up their failing businesses. Gradually the whole edifice collapsed, and oil prices fell to around $50 a barrel, although nothing particular had changed in the actual supply/demand relationship. The flaw in the system was to treat a finite resource whose production was largely controlled by the immutable physics of the reservoir as if it were a normal commodity capable of responding to ordinary market pressures. If the price of potatoes increases, farmers can grow more and the market responds, but oil is different.

Governments responded to the crash by pouring yet more money, itself lacking genuine collateral, into the system in the mistaken belief that this would restore the position of assumed eternal growth, and quite possibly the stock market will respond positively as traders sense a new upward direction. They have no real interest in reality: their job being to try to reap rewards from short term movements. But if there is an economic recovery, that would serve to increase the demand for oil, which is in a sense the bloodstream of the modern world, and oil prices would again begin to surge. Probably, it will take several such vicious circles before governments and, more important, people at large at last come to grasp the reality of the situation, which will likely prompt radical changes in the human condition.

Here is the report:Association for Peak Oil Dec. 2008 Newsletter