When it’s clear that we’re running out of oil, as predicted by M. King Hubbert in what’s known as the Peak Oil theory. The theory, roughly stated, is that there will come a point in time when the rate of maximum extraction of crude oil is reached and starts to decline forever after, pushing oil prices higher and higher and the world economy into a never-ending spiral downward.
The only trouble is that Hubbert expected that point in time to be between 1965 and 1971 and we’re still here, enjoying higher energy consumption and its resultant higher standard of living than Hubbert could possibly have imagined (he died in 1989).
The Boston Company published an 11-page report last month, called “End of an Era: The Death of Peak Oil“, and the authors think the argument is over, Hubbert was wrong, hallelujah! But they are scientists and economists and rather bookish, so their dance on the grave of Peak Oil is somewhat more muted:
For decades, pundits have been trying to predict a tipping point for Peak Oil – when a sustained and unabated climb in oil prices sparks a near-collapse of the global economy. According to Peak Oil theory, the rate of petroleum extraction will crest and then begin an immutable decline, pushing oil prices ever higher as demand for this finite resource permanently exceeds supply.
However, changes in both supply and demand have pushing out that tipping point very far into the future:
However, an array of structural shifts in the Energy industry is conspiring to insulate the global economy from any such dramatic increase in the price of oil. After decades of indifference, pivotal U.S. consumers have radically altered their consumption of petroleum and related products, moderating demand for the world’s largest market. Concurrently, heightened investments and technological breakthroughs have spurred an explosion in resources…
It’s that nasty inevitable and irrevocable law of supply and demand or, has some have called it, the working out of the dictum that “the cure for high prices is high prices.” Given the profit incentive and the freedom to risk capital to possibly obtain it, capitalists will provide what customers demand.
Here are the main points from the study, from the supply side and from the demand side:
1. Increased investment in exploration, development and drilling
2. Technological breakthroughs. “Fracking” is now a household word.
3. Offshore drilling
1. Consumers are cutting back
2. Cars and trucks are getting better mileage.
3. Natural gas is replacing oil for transportation and home heating.
The Boston Company offers investment advice to its wealthy clients. Here it is:
The shale revolution has created an opportunity that we view as one of the dominant investment themes of the next decade …
It is by having this longer-term perspective on how North American hydrocarbon pricing will evolve and which companies are exposed to this trend that we can seek to capture the excess returns and dividends provided by this theme.
It’s those “excess returns” that they’re hoping to capture for their clients as the world moves on past the concerns about Peak Oil into the future.