Peak Oil Investing

Think back to July of 2008, oil was over $140/barrel and a lot of talk on “Peak Oil” (the point in time when the maximum rate of global petroleum extraction is reached) was floating around. By late December a hard hitting recession (depression?) and a strengthening dollar drove prices under $35/barrel. Suddenly there was very little peak oil talk. Today oil is around $60/barrel – and dropping. It is time to again visit peak oil thinking.
Several factors influence oil’s price. The fundamentals, of course, are supply and demand. Wars and rumors of wars, especially in the oil rich Middle East, can drive prices sharply higher in just minutes. Quantitative easing (printing of money), technological advances, Middle East stability, market manipulation, “herd mentality”, all influence oil prices. So, any discussion on peak oil must also consider non-fundamentals.

Oil fields, once put into production, go into decline as the easiest to recover oil is drawn off first. In fields all over the world, the “easy stuff” is now largely gone. Even the massive Saudi Arabian fields are in decline. This is true of course for all resources. Consider copper: In early settlement days large copper ingots were found simply lying on the ground in parts of Michigan as gold nuggets were found in parts of California.

The Middle East, as always, is a wild card. Rumors, which may be true, hint at vast undiscovered fields in Iraq and Saudi Arabia. Iraq has had little exploration activity due to continual wars and unrest. Recently revived exploration in Libya, however, has not been particularly fruitful. Are there new, undiscovered large oil fields in Saudi Arabia? Maybe, the country is vast, yet it is unlikely another Ghawar (largest oil field in the world) will be found. In a best-case scenario the Middle East can maintaine, and possibly increase, to some extent output for the next several years or more. In a worst case scenario unrest and the rise of Islamic fundamentalism can cause all kinds of mayhem. It is worth noting that now is a relatively peaceful time so it probably can’t get much better as far as the Middle East is concerned.

Seeking Alpha