Peak Oil is a Cost Issue

Underlying nearly all discussions of the oil price is a standard economic concept: supply and demand. It seems so elementary that there is no doubt of it. It says that demand has been growing more rapidly than supply recently and that at some point the world will reach Peak Oil and the price will zoom northwards.

But the reality is more complex. Peak oil is not just a point in time or even a plateau when oil supply becomes unable to expand to meet demand. We need a more nuanced model for oil prices that includes several other factors.


First, there is the role of speculators. OPEC officials often say the locals in New York are the culprits responsible for higher oil prices, an idea that often is dismissed as simply a way for OPEC to focus attention away from their own responsibility. But the fact is that prices are determined in the oil futures pit to a large extent and some speculators, like hedge funds, are represented in the pit. Speculation is not just a form of gambling or