Peak Oil and prices in two years from now

By One Salient Oversight

Summary: Oil prices are dropping as demand destruction bites. But that
doesn’t invalidate Peak Oil. Supply limits will continue to exist even
when oil prices and demand drops. This means that the price of oil will
still be too high even when the economy is at its lowest ebb.

The economic stress caused by Peak Oil will not be quantified by how
high oil prices rise, but by how low oil prices don’t drop.
Okay, so the allegory goes like this: Oil prices are like blood pressure
in that the record price of oil ($147.27 on 11 July 2008) represents a
systolic price – the maximum price of oil that the market is willing to
pay under current economic conditions. But, with the clear presence of
demand destruction caused by current economic strains (including the
effects of high oil prices and the subprime meltdown to name just two),
the price of oil is now dropping.

But, just as a diastolic reading can be too high, so can the price of
oil when it falls. If Peak Oil is true and there is a geological limit
to how much oil can be extracted, then it stands to reason that this
will not just create record high oil prices, but also oil prices that
are too high when demand has fallen.
Peak Oil commentators and “experts” will probably use this
latest report (EIA report on massive drop in US oil demand in June 2008)
to prove their assertions that the high price of oil is merely the
result of “speculation” and can be lumped together with the entire
commodities market. In their minds, oil and commodities will, at some
point in the next few years, return to “normal” levels.

So, same data, different conclusions. But it will be the next two years
that will vindicate Peakniks – not by some magical rise in the price of
oil back to $149 per barrel again, but by the stubborn refusal of the
market to lower the real price of oil back to pre-2004 levels.

So what will the price of oil be? That depends, of course, in just how
far the world economy contracts. A real price of $40 per barrel may
actually be reached again – but this price will still be too high for
the market to consider reasonable. And when the world economy begins its
recovery (as is inevitable), then any increased economic activity will
be severely limited by relatively high oil prices occurring again. And
these prices don’t have to be up around record levels to stunt any
recovery – they may still be below $100 to make life difficult for the
So, to summarise my prediction – I predict that oil will drop below $100
in the next 12 months, but remain too expensive for the market to be
happy with over the next 3 years.

And that, of course, will keep the diastolic blood pressure of the
economy at dangerous levels.

by reader One Salient Oversight

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