Petrobabble

One of the respondents on a blog I read made an excellent point the other day. “Everybody agrees that oil is the most important substance on the planet. Given that, how is it possible that there is total confusion about the most basic facts relating to it.”

Anyone making even the slightest attempt to research the subject of oil will very soon find that there is, indeed, an absolute absence of anything remotely resembling agreement about almost any quantitative aspect of the subject. There are countless analyses, at varying levels of complexity and accessibility in terms of the words and pictures used, but these experts end up saying diametrically opposite things. Not about what might happen in the future, but about what is, right now. You could easily believe that they were talking about different planets.

Sherlock Holmes was wont to make the point that “it is a capital mistake to theorise without data”. Holmes was clearly not a petroleum geologist, otherwise he would have known that theorising without data, or at least without agreed data, is much more fun. There is, for instance, a whole school of experts who believe in ‘peak oil’, i.e. that oil production is approaching (or already at – or maybe has just passed!) its peak level on a global basis. This is very serious, of course, and its starting point is unarguable: there is a finite amount of the stuff – in every well, every field, every formation and ultimately in the whole world. We have ample experience of specific wells, fields and even of countries passing their peak production point and beginning the slide toward total depletion. Has the world as a whole reached that point? Will it soon? The answer is whatever you want to believe it to be: last year, this year, next year, ten years time, a hundred – there’s someone with fancy words and nice pictures to ‘prove’ that his answer is THE answer.

The debates about how much oil there is, where it is, how accessible it is and how much might be recovered, now or eventually, have been rumbling on for many decades. But when the attention of the whole world is fixed obsessively on the price of oil, these learned academic debates get mainstreamed, popularised and warped into something they were never meant to be, or ever can be – the basis for long-term policy decisions and short-term investment decisions.

As this is being written – and again while you are reading it – some stupid sap is placing a buy order with his broker, or online, to invest in the shares of an oil company, or an energy-sector ETF, or a futures contract on heating oil, or some other financial instrument giving him (or her – but mostly him) exposure to ‘the energy sector’. In at least 90% of these cases, probably more in the current environment, this investment will generate a loss -usually a hefty one, in percentage terms. Yet most of these ‘investors’ are basing their speculation on something they read about ‘oil running out’, or a version of the peak oil theory.

This column has no truck with peak oil. I continue to believe that the planet is swimming in oil, much of it in Iran, Iraq and underneath or offshore the Arabian peninsula. If these countries would have invested serious money over the last 5, 10 or 20 years in developing their vast officially-declared reserves (which may be ‘proven’ or fictitious, or a mere fraction of what’s really there – depending on whom and what you want to believe), the global supply-demand situation would look entirely different.

But, for the purpose of the discussion, let’s adopt a ‘moderate’ peak oil stance – let’s assume that the tipping-point when production begins to fall on a global basis is 15-25 years away. Does it therefore follow that oil will soon be $150 a barrel, then $200 and so on? Can the price only go up?

 The answer, of course, is decidedly not. Demand – next year, say – could (and may well) fall sharply, for any of a range of economic, geo-political and even technological reasons. In which case the price would plummet in the near future and anyone buying at current prices would be creamed (unless he had meanwhile found a ‘greater idiot’ to whom to sell his stuff). This short-term cyclical fall in demand and hence price would in no way alter the ‘fact’ that in 2030 there would be a real, honest-to-goodness energy crisis as global oil production turned down. So when you take a punt on oil prices, cut the geological mumbo-jumbo and just roll the dice.

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