Don’t dismiss the average oil price

From Environmental Economics:

Globalisation and the Environment: Peak Oil Man discovers economics!

“Peak Oil” and the peak oilers associated with this idea are a strange bunch. It is interesting to note that the daddy of peak oil has suddenly realised that “economics” might have something to say on this matter.

Economics is sometimes a little more subtle than supply and demand. Behaviour is the key.

Peak Oil Man Shifts Focus To Peak Price, Demand [World Environment News]

The economic shock of global recession has led a prime exponent of the theory conventional oil output has peaked to shift his view of the consequences, but he still thinks the world has to go green.

Retired petroleum geologist Colin Campbell, who worked for major oil companies as well as smaller firms, has long been associated with the belief the world’s oil supplies are dwindling.

He does not waver from that and dismisses the argument of the so-called optimists that technology will manage to keep eking out more and more oil to keep pace with rising demand.

What has changed is his opinion of the price impact and implications for fuel consumption after the spike of July 2008 to nearly $150 a barrel was followed by world economic recession, a deep drop in fuel use and a crash in oil futures to just above $30 in December 2008.

“I have changed my point of view about future prices,” said Campbell, who used to think the peak in conventional oil production, which he believes happened in 2005, would lead to a relentless price surge.

Oil prices may get too high to the point where it puts a strain on the economy and may push it towards recession, depressing prices of oil towards decade lows, but one shouldn’t dismiss the average price of oil over the last century, which has significantly increased. If there was something that Campbell underestimated about peak oil it is that as the average price of oil rises, the allocation of consumption towards cost effective substitutes helps depress average oil prices lower. Campbell is underestimating capitalism’s flexibility. But, he is right that the average price will still continue to rise. We will know when oil has reached it’s highest price when the market mechanism allocates more consumers toward cheaper alternatives.

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2 responses to “Don’t dismiss the average oil price

  1. “We will know when oil has reached it’s highest price when the market mechanism allocates more consumers toward cheaper alternatives.”

    What cheaper alternatives? Oil is ridiculously cheap in relation to its versatility and capacity to do work.

    Consumers will respond to high oil prices by – horrors – using less energy (not going places, buying less stuff, eating less food). In an industrial society, less energy consumption means fewer sales, less capital available and so on.

    As capital drains, the capacity to invest in “cheaper alternatives” (a wild goose chase in the circumstances) will diminish. Either the miracle cheap energy input that economists always imagine into their theories happens, or the shrinkage continues.

    People still looking at the price of things without asking themselves where prices derive such strength or meaning as they might have, will doubtless be mystified.

    The modern dollar was designed to help price rising net energy. As net energy declines, _it_ (effectively, oil) sets the price of the dollar. Where the dollar’s heading, the highest price of oil could be $10.

  2. You make a good point that Oil is still, in relation to it’s alternatives, very cheap. But you shouldn’t discount the fact that the alternatives exist. Where we think the price of oil will go, and how much of an impact it will have on gas prices and overall consumption, is debatable. I think we should agree that there is a point where “the wild goose chase” for alternatives actually becomes viable.

    Coal is cheaper than oil and coal can power lithium batteries, making a perfect substitute (with real-world examples already an economic reality) for urban transportation. This helps put a downward pressure of oil prices for those who need it in a rural area. Technologies for making bio-diesel cost-effective is on the horizon. (Read my blog more if you don’t agree)

    As for the price of oil effectively being pegged to the dollar, assuming apocalyptic scenarios of inflation eroding the real value of oil isn’t possible. If you don’t believe that the rising average price of oil is a real change, and instead an inflationary one, the data says the contrary…

    Note that I said the “average price of oil,” not using the current or maximum as my gauge of oil prices. If I misunderstand where you are going with your argument, I apologize.

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