SPEAKING
FREELY The 'peak oil' deja
vu By Bob Hoye
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From Wall Street to
Main Street, concerns over the phenomenon known as
"peak oil" have reached a fever pitch. "Peak oil",
of course, is the hypothesis that global crude-oil
production has peaked, or will soon, and is
destined to start a permanent decline thereafter -
with frightful consequences, it is usually argued,
for Industrial Civilization as We Know It.
Unfortunately, there are still some
laggards who are not sufficiently impressed with
the self-evident truth of this theory to be
spurred into dramatic action. Consequently, a
leading energy
expert
has slammed the skeptics and, at the same time,
elevated the status of the true believers.
Although energy is mainly a secular
matter, the expert writes: "This is a question of
almost religious importance which needs the study
and determination of every intelligent person."
His key message is: "It is the material energy -
the universal aid - the factor in everything we
do. With petroleum almost any feat is possible or
easy; without it we are thrown into the laborious
poverty of early times."
Straight from
today's editorial pages, except for two minor
details: these quotations have been provided
without a date, and with one key word changed.
The date was 1865; the important energy
source was coal, not petroleum; and the writer was
Stanley Jevons - a leading economist. His book,
The Coal Question, was thoroughly
researched and broadcast his personal concerns
that the industrialized world was about to run out
of coal and civilization would therefore collapse.
Now, of course, the concern is that we are
running out of oil and great distress will follow.
As with any such concerns both then and now, the
intellectual speculation seems mainly driven by
soaring prices. Commodity prices had been
increasing for 20 years in 1865, and soared
further with the American Civil War and the dollar
depreciation that went with it.
However,
the predicted collapse never materialized.
Instead, the market soon attended to the price
problem. To this day, there is no shortage of
coal; in fact - ironically - plentiful coal
supplies are periodically alluded to as an
alternative to allegedly "peaking" oil.
Crude oil has the headlines today. If we
examine historical crude prices, adjusting by the
Producer Price Index (PPI) to eliminate the
effects of currency fluctuations, an interesting
story is revealed. The real price soared to US$73
with the 1980 oil crisis, before plunging to $16
in 1986. Now, 20 years later, it is again back to
$73, and those who insist that their intellect and
personal concerns are superior to market forces
are again getting the headlines.
This was
the case for coal in 1865, but one doesn't have to
go back nearly that far to find embarrassingly
flubbed predictions about energy supplies. On
February 25, 1980, the then-US secretary of energy
Charles W Duncan baldly asserted that market
forces didn't apply to crude oil: "One thing is
for certain, [crude] prices will continue to rise
... [the] traditional criteria of supply and
demand don't apply."
It seems that the
higher a mania runs, the higher the intellect that
succumbs to it. If, indeed, oil prices moved
solely on dysfunctional Middle East politics, then
the chart would show a relentless rise from lower
left to upper right - beginning as the Royal Navy
converted from coal to oil in the early 1900s.
Instead, crude's actual price history mostly
records major changes dependent upon recurring
manias in commodities, as well as the
four-to-five-year business cycle.
Of
course, prior to the development of petroleum as a
commercial product, distillation of coal and/or
whale oil provided illumination, chemical and
cosmetic needs, and prices of these soared with
the great commodity inflation era that blew out in
the 1860s. Ironically, it was in the late 1860s
that petroleum started on its path to become the
giant it is today. In the long history of the
financial markets, it didn't take long before
"King Coal" became "King Crude".
The next
mania in commodities climaxed in 1920, and
crude-oil investment became extremely compelling
when Mexico briefly carteled the price. At the
time, Mexico was the world's second-largest
producer (after the United States), accounting for
some 25% of global production.
This
intervention anticipated the modern-day cartel
attempted by the Organization of Petroleum
Exporting Countries (OPEC), which flourished
during the 1970s and flopped in the 1980s. But, as
noted above, the chart is rarely a straight line
and the 1920 high was slammed by the deflationary
contraction that followed the 1929 stock bubble.
In gold terms, the price of crude fell to about a
quarter of its high, which was about the same as
the long slump in whale-oil prices following the
1873 stock bubble.
It is very likely that
petroleum prices remain subject to the historical
long-term trends, with the ups being provided by
great asset inflations, and the downs provided by
the lengthy post-bubble contractions.
Fluctuations caused by the
four-to-five-year business cycle are also evident
in the history of crude prices. On the most recent
one, crude prices have rallied from $17.48 (spot
West Texas intermediate) in November 2001 to the
recent high of $75. However, it's important to
peer through the distortions caused by policies of
deliberate currency depreciation, and this can
best be done by adjusting the price according to
the PPI.
The "big" high with the 1980
Iranian crisis was $73. This sets the 2001 low at
$21.82, from which it has soared to $75. In 1980,
the prediction was that crude would get to $90,
which compares to today's touts of $100.
Obviously, conditions today are as speculative as
at the 1980 high or, for that matter, at the 1920
high.
With such market compulsions evident
again, it's natural to ask the question, "Are we
there yet?" - meaning at the end of yet another
speculative trip in energy prices. In answering
this question, it is prudent to observe that every
great mania in energy prices has occurred close to
the peak of a business cycle. For many, the main
prerequisite to a slump in crude prices would be a
cessation of the troubles in the Middle East,
which is unlikely. For the more disinterested, the
best explanation would be just another post-bubble
business contraction whereby prices for most
commodities go down, including oil.
There
are other forces acting on crude prices as well,
of course; such as the seasonal pattern with a
high in the late spring and a decline into the
late-June-to-early-July window. However, one of
the most relentless forces acting on commodity
prices is deliberate dollar depreciation, and this
is subject to influences outside the Federal
Reserve Bank.
If the Fed's intentions were
supreme, the dollar chart would also be a straight
line from the upper left to the lower right, but
this is not the case, as there are many occasions
when the Fed just can't depreciate. Typically,
this also occurs during post-bubble contractions,
when implacable market forces deny the policies of
depreciation. According to the technical analysis
that identified the dollar's low in December 2004,
the dollar index is poised for a rally, in which
case an essential part of the compulsion to
consider commodities as an asset class to "invest"
in will diminish.
Nonetheless, speculative
excesses have captured the imagination of pundits,
punters, policymakers, and intellectuals in a
manner uncannily reminiscent of the similar
excesses displayed by the same crowd in 1980 - or
during any of the other great commodities bubbles
in economic history.
