Thursday, November 1, 2007

The Peak Oil Scare

What is Peak Oil? In a nutshell it's the notion that we've passed the halfway point of world oil supplies and from here on out it gets more expensive and more scarce. The town criers of this scenerio don't stop there. They predict the end of civilization as we know it as our ever increasing dependence on ever more expensive crude causes economies to collapse and governments to ration energy. The good news is they're off their rockers.

Is oil getting scarce? Maybe. Will it get ridiculously expensive? Maybe. Are we so oil dependent that we can't operate without it? Absolutely not. Exxon's margins on gasoline actually dropped in recent quarters. That's because there is a limit to how much people will spend on gas. When it topped $3, we drove less. We left the SUV's at home. Sales declined. The price came down even as oil continued up.

Crude's still got some room to rise. It's still the fuel of choice due to it's relatively low price (even at $100/barrel) and its widespread availability. But at $4/gallon for gas, other options become commercially viable. You can already get wholesale biofuels for about $2.25/gallon. Hydrogen on demand vehicles are very doable. As are flexfuels, TDP, methane, ethanol and a host of others, not to mention the newly discovered method of releasing hydrogen from salt water using radio frequencies.

The only reason these alternatives aren't more widely used now is that they aren't yet competitive in the marketplace. It will take more than a short term spike to take oil out of the game. But once the price gets too high for a protracted period of time, investors will take the plunge and go full speed ahead with other options. The other thing working against oil is that technology is bringing the price of many of these alternatives down. Solar Ink may bring the cost of solar down by a factor of 10 within 12-24 months. What do you think that will do to the solar market?

Oil is reaching a peak. The peak of its usefulness as a fuel source. Only one thing will bring the fall of the global economy: bad government policy. Free markets enable rapid adaptation and resource allocation.

Is there manipulation in the oil market? Probably. But eventually, some group of chumps will be left holding the bag when the crude bubble bursts.

No comments: