Energy Q&A Part I: Peak Oil and Oil Price Spikes

by BWK ~ June 17, 2008

Q: “I saw you on Fox Business News. You said that you think the price of oil is too high and will come down. You have been a long-time ‘Peak Oil’ guy. So why do you think that oil prices will come down?”

Yes, I’m a long-time Peak Oil guy. I met M. King Hubbert back in 1977 at Harvard, and heard his lecture on where the trends are taking us. So I’ve been doing “Peak Oil” since Peak Oil wasn’t cool.

Long term, I am convinced that we live in a Peak Oil world. But we also live in a world of markets and market mechanisms.

My take on oil prices is that they are “too high” just now. It’s those doggone traders, like Kevin Kerr. Well, not really. Kevin can actually show you how to do it right. It’s the traders who are NOT like Kevin Kerr. It’s the traders who are just throwing money into the futures markets. Those traders have driven oil prices up too far, too fast. There is such a thing as overextending the market.

In the medium- to long-term future, oil prices will surely be higher for fundamental reasons. But we are not there yet.

Today, there are no fundamental reasons for $135 oil. Oil exporters can supply all of their customers. As one senior executive of Saudi Aramco told me in Houston a few weeks ago, “We can meet the needs of customers. No one goes away empty-handed if they need oil.”

Across the Gulf from Saudi Arabia, the National Iranian Oil Co. has over 20 million barrels of crude oil sitting in storage. The oil is in chartered tankers off Kharg Island. OK, it’s sour crude oil and a lot of the world’s refineries cannot take sour crude. But the oil is still sitting there. Those tankers swing on their anchor chains, waiting for a buyer.

And oil buyers do not have trouble finding supplies. Senior executives from Shell and Chevron have told me that they can get whatever they want to supply their refineries.

So that’s why I believe that the recent run-up of oil to $135 per barrel was just too much. The current price, in the high $120s, is “too high,” as well. That high price is doing severe damage to the world economy.

Overly high oil prices are draining world consumers. Take the critical case of high fuel costs killing the airline industry. Six more months of this and you will not recognize the world air transport business. I’ve been calling this airline disaster “Silent Spring.”

And it’s not just the ever-whining U.S. Sure, people in the U.S. harp and complain about the price of oil to OPEC. (Hey, I have an idea. Let’s sue OPEC in federal court. That’ll teach ’em, right?) The Europeans, Japanese, Chinese and much of the rest of the developing world have joined in. Many representatives of nations and alliances have passed warnings to the leaders of oil-producing and -exporting nations. So in the near term, I expect oil producers to allow prices to pull back by $20-25 per barrel, into the low $100 per barrel range — say, $100-115.

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Additional Resources:
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Oil At $200 Would Mean What?…