Is 'Peak Oil' Already Affecting the Stock Market?

If I were asked to recommend an energy advisory team for the next President I’d start with Robert Hirsch.   Hirsch is a defense planning expert who has headed up major consulting assignments for the Defense Department among other clients and in 2005 he published a major study of the impacts and potential mitigation of Peak Oil.  It famously forecast that a successful transition from oil dependency would need to start 20 years before oil production peaked.

In an interview published on a web site operated by Allianz, the German financial giant, Hirsch outlines the problems of Peak Oil as he sees them today.  He believes the crisis will be upon us within a few years, which is consistent with the predictions by other experts such as Simmons, Skrebowski, and Maxwell  as I have previously reported, all of whom believe oil production will begin declining within a few years. 

What Hirsch adds uniquely is a more nuanced vision of the limits to our economy’s ability to cope with peak oil. Hirsch’s discussion of the economic constriction and great weakness in financial markets that he expects will constrain our normal capacity for remediation of the problems is particularly sobering because of his expertise in evaluating exactly such macroeconomic questions.  He adds that voluntary reduced oil production (hoarding) by some oil exporting countries will exacerbate the scarcity of oil itself.   His essential point is that the dimensions of the global economy’s dependence on oil are so huge that its scarcity will be crippling and will preclude any easy solution.

I think Hirsch is essentially correct.  But I am more optimistic that electrical transportation solutions to the oil shortage can be substituted in OECD countries at a faster pace than Hirsch seems to think is possible, thus perhaps limiting the most extreme economic difficulty to a period of only five to ten years rather than twenty.  After all, if the U.S. could go from a standing start in 1940 to substantial war production just a couple of years later, we could accomplish a similar transformation of our transportation systems in a shorter period than might be able to be forecasted.  The technologies for making cars that get 100 mpg or even more are already in development.  The question rests on whether we will have the same political will that was demonstrated by Roosevelt to deal with the oil shortage crisis.  Some countries - Israel and Denmark - have already begun down this path.

The Saudi Vision

Contrasting with Hirsch’s longer term view of peak oil is the Saudi’s belief, shared by many others, that currently high oil prices are mostly a function of financial market speculation and secondarily of lack of refining capacity.  On the second point the Saudis are undoubtedly correct in that a great deal of high-sulfer heavy crude is available but cannot be used because the refinery capacity for such inputs is insufficient.  After all, Iran reportedly has 25 tankers of such oil floating offshore that are unable to unload due to lack of appropriate refining capacity. 

Over the next few years a good deal more refining capacity in a number of developing countries for heavy sour crude will come on stream and will no doubt help alleviate the supply problem.  The Chinese recently started up one such facility.  On the other hand, that won’t have much impact in the next year or two and by the time it comes the decline in conventional oil production after 2010 will probably make supply constraints so much more acute than they are now that the net result will still be much higher oil prices.

The more immediate vision of relief that will apparently be offered by the Saudis Monday, according the The Wall Street Journal Sunday, is an end to financial speculation - if the OECD countries take appropriate action.  In other words, the Saudis are suggesting that current supplies are sufficient (the same tune they’ve been singing for the past year) but speculators are hoarding supplies.  This is a theory the truth of which is hotly debated by experts above my pay grade.  I take no sides (but color me skeptical), but I do hope that Congress and/or the S.E.C. and/or other agencies will take measures to find out if the theory is true.  

I have no problem with the idea of banning hedge funds or other large speculators from the oil pits.  Clearly the potential understanding of the reality of high oil prices that would come out of such actions would be a far greater benefit to society than the loss of a bit of freedom for hedge funds.  Whether speculators have anything to do with currently high oil prices is an important question that we must put to rest.  Of course, whether the Saudis in fact have the oil reserves they claim and whether Ghawar is at near term risk of declining is another bit of knowledge to which the world should have access.  Somehow, it seems doubtful that the Saudis will offer this important insight this weekend. 

What seems clear to me, however, is that if the Journal’s report is correct and the extent of the new short term oil production offered this weekend is fairly limited, the likely result will be higher oil prices in the near term.  If that is the upshot, I suspect the Saudi meeting will be seen as a disaster and an indication that there are no real near term solutions for tight oil supplies. 

Are We There Yet?

We know that Hirsch is right; there will come a time when oil scarcity will hobble the economy so severely that the stock market will crash and it will not be profitable to own any stocks, even energy stocks.  As I finished reading this interview, I asked myself a question that I find is recurring more frequently.  Has that time come already? 

Friday’s market seemed like a foreshadowing of that time.  The market averages were down nearly 2% partly in reaction to higher oil and gas prices.  The EIS portfolio made up almost entirely of companies that benefit from higher oil and gas prices was down about .5%.   Losing money is not the objective of any investor, so the fact that I lost less than some other portfolios is really not comforting to me. 

Maybe the current weakness is primarily a function of the continued implosion of the housing and financial sectors.  But clearly these sectors’ problems are seeping into the general economy and starting to destroy consumer demand.  My concern is that if oil prices keep rising on the trajectory that has been in place for the past fifteen months, the economy may simply not be able to make a normal recovery. 

In other words, oil prices are rising rapidly even though oil production may not yet have actually peaked.  If oil supply continues to be very tight, the oil price may simply continue its rise, anticipating the advent of peak oil, regardless of whether production has yet peaked.  If that is the way that 2008 and 2009 play out, then the impact on stocks that I anticipate will happen in a few years could be starting to take place already. 

The end point of this exercise will be a portfolio made up of high quality bonds, ETF’s that mimic the price of oil and gas (USO), (OIL), and (UNG), and perhaps some very high quality long term oil and gas assets like (SU) and (COSWF) and perhaps (DVN), (APA), (XTO), and (CHK) that will ultimately be bought out for cash by the oil majors.  Even the oil service companies may be too risky to own when everyone is cashing out of the stock market in a panic. 

For the past year such stocks are lagging the commodities, indicating that they still represent excellent value.  But the early stages of a market decline driven by fears of oil shortages is likely to bring a concentration of funds allocated to the oil and gas sector resulting in fairly good gains in most stocks in the EIS portfolio.  Oil and gas stocks, including the service and drilling companies to a lesser extent, will probably behave like the Nifty Fifty of the 1970’s.  When that happens, when values in these stocks have discounted higher future oil prices instead of lagging behind current oil and gas prices, it will be time to sell them and go to the portfolio of high quality bonds and oil and gas ETF’s.  

Comments

[cjwirth]

No one has a plan of how we will use electric power for truck and train transport, nor is there a plan of how to use electricity to power tractors and combines (this being especially challenging). When oil production declines enough, we will not be able to maintain the Interstate highway, nor the electric power grid. This is not so far in the future, maybe 10 years. The U.S. will experience Peak Oil impacts sooner and more severely than much of the world. Most studies indicate that Peak Oil is here now. Anyone interested in relocating? See the free 50 page report here: www.peakoilassociates....

[User 202445]

Interesting that Hirsch doesn't think much of renewables. He leaves out battery technology and its ongoing development which is considerable. The market economies think otherwise with hydrids, Chevy's upcoming Volt, the run on lithium companies, etc. But Jim is on the mark in these areas.

[Glenn Morton]

I wrote about peak oil in 2000 www.asa3.org/ASA/PSCF/...

I have followed the energy investment strategy since then and I agree that the economy is going to take a hit. The only thing I disagree about is that bonds will be as worthless as stock when the economy tanks. How can corporate bonds pay off when the corporation makes no money and how can government bonds pay off except in inflated dollars when there is nothing to tax?

[Brian Pursley]

"He believes the crisis will be upon us within a few years, which is consistent with the predictions by other experts such as Simmons"

Ghawar peaked in 1981: peakoildebunked.blogsp...

According to "expert" Matt Simmons Ghawar is now empty: peakoildebunked.blogsp...

Matt Simmons also says speculators set oil prices: peakoildebunked.blogsp...

However the fact is that speculators have less than zero to do with the commodity price: www.bloomberg.com/apps...

Peak demand is real: peakoildebunked.blogsp...

"Peak oil is garbage" -- Robert Esser, geologist

Of course the perception of peak oil is "affecting" [sic] the market. If human stupidity weren't a factor in the stock market there would be no daily price fluctuations and no volatility.

[Sad but true]

With battery technology and nuclear power, we could remove ourselves from oil dependency very quickly.

I don't want to talk politics but the world needs more refineries able to handle the increase in supply once the "wildcatters"... come on the scene and bring an infux of oil on the market

[mpkirby]

"With battery technology and nuclear power, we could remove ourselves from oil dependency very quickly. "

When the amount of energy being discussed is measured in "qudrillions of BTU's", nothing happens very quickly.

We currently need about 6 quads for transportation. It's about 28% of our total energy use. WE currently generate about 8.4 quads of electricity.

Don't delude yourself into believing that anything happens quickly with this infrastructure.

WE need:
- More technology development for electric transportation (5 to 15 years)
- More conventional electric generation (5 to 20 years)
- More alternative energy generation (2 to 20 years)
- Better urban planning to avoid sprawl that requires large numbers of miles driven (20 to 100 years).

What this means is that your children will likely not have the same lifestyle that you have. Your grand children (if you are lucky will be back to parity with what we enjoy today. Your great-grandchildren may (if something else doesn't peak) actually start to grow again.

Mike

[Michael Levy]

10 Reasons Why Oil Price Speculation Requires a Change in the Rule of Law by Michael Levy

High oil prices that are governed by the commodity markets are in dire need of common sense law and order. When speculation and detrimental logic and reasoning take central command of human society, the results always turn out to be damaging to the majority, at the abundance of the few. The experts and speculators will argue we need free markets and any interference will take away free trade. Well, in many cases they are correct, however, when it comes to essential commodities of food and energy they are completely out of order. Here are a few reasons why essential commodity markets require new legislation.

1. There has been no shortage of gas at any filling station for the past 10 years yet prices are up 1200% because of futures trading going out more than eight years. Even the Saudi oil minister has recently stated the price of a barrel of oil should be no more than $70.00. Demand from China and India is still far less than that of the USA. The Chinese stock market is down 50% signifying a sharp slow down. This news still is not enough to stop the wild speculators hiking the oil prices.

2. When hurricanes hit Florida many gas stations are closed and there is a real shortage of gas for a few days. However, if a gas station increases its prices they will be prosecuted for price gauging. Therefore, if we take the experts argument that there is a shortage of oil then that still does not give anyone the right to profit from the shortage as this is deemed to be prices gauging. How can the USA governments have double standards and prosecute gas station owners who price gauge and not treat commodity markets in the same manner?

3. Oil is an essential commodity for every day living in the same way as water is an essential commodity. It makes no sense to trade water so why leave oil in the hands of anyone who wants to make a quick buck gambling on prices.

4. Pension and hedge fund managers have invested billions of dollars in oil futures. The futures markets are very volatile, thus, no place for pension funds to risk the money for people who trust them to build future wealth. The fiduciary duty of a pension fund manger is to find reasonable returns with low risk and the commodity markets is not that place.

5. If the price of oil was regulated between $40.00 - $80.00 a barrel, the price could go up and down on supply and demand. This would be fair to everyone, for even when supply was plentiful, the price would not drop below $40.00 which will still give a fair profit to most oil related industries. When oil is in short supply the price would be limited to a ceiling of $80.00 which is more acceptable to world economies.

6. There is a moral issue that greed cannot come before peoples basic needs ... No right-minded, ethical, principled government can allow starvation and financial ruin because of a system of trading that is completely out of control.

7. The price of a barrel of oil effects transport, food supply, industrial production and every part of modern day living. If terrorists wanted to devise a plan to destroy the world. economies what better way than finding a method to allow oil to trade at $140.00 a barrel. Why play a game that makes terrorists and anarchists happy.

8. Goodwill to all people is the credo every democratic country is built upon.$140.00 a barrel oil delivers no goodwill. It only brings hardship and political uneasiness.


9. Noble deeds and fair dealing is the hallmark of success for every truly prosperous person. Since the world is made-up from people, where are the noble deeds and fair dealing in the commodity pits.

10. We are all put on earth to help each other succeed in the pursuit of freedom, liberty and happiness. There is no freedom when people are slaves to greed. There are only liberty takers when oil trades over $80.00 a barrel. And finally financial hardship brings misery and discontent.

The time for change in essential commodity trading is now. To quote a few voices from the past...

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor”_Thomas Jefferson

“For greed all nature is too little.”_Seneca

“It is greed to do all the talking but not to want to listen at all” _ Democritus

“He who is greedy is always in want.” _Horace

[User 214599]

The above post is nonsense. Markets give information. They are warning us now about Peak Oil. Ignore at your (our) peril.

Obviously, price increases will be the only effective instigator of a real effort to move to renewable energy.

The transition will be very, very unpleasant, tho. No combination of renewable energy sources, as of now, can scale up rapidly enough or provide more than a small fraction of the energy we get from oil.

Listen to what the markets are telling you. Don't tell them to shut up.

[dissturbbed]

sure peak oil is coming without a doubt but this peak will last a long time due to the decrease in demand because of high energy cost and etc.

[badassbear]

It is hard to believe Michael Levy means his rant above. If he is an investor, I am surprised he still has any capital if he has his head so deeply in the place the sun doesn't shine.

Oh, by the way, you can and should trade water--potable water, like energy, is increasingly in short supply. This all reminds me of the folks who say health care is a right. Yeah, and now energy and food are rights, too?! We seem to have forgotten that it is a very draconian world and though we have a veneer of civilization, we are animals competing for increasingly scarce resources. Things are going to get much uglier and such stupidity only slows our path to making difficult decisions to try to make things better. When will we finally learn that the failure of Communism/Socialism exemplified by the Soviet disaster was not because they screwed up its implementation but because the whole system is idiotic and will never work.

[nakedjaybird]

nakedjaybirdJun 23 02:07 PMWhere have some of you folks been? In "school" maybe???

In the early 1970's we concluded it was going to take hybrid electric vehicles for anything beyond the basic 40-50 mile daily commuter using fully electric cars, when and if he was ready to switch from huge gas guzzlers (we knew this because we built and tested electric vehicles! And, there is a market for both types of vehicles). The shackles have been off for the private sector for 40 years.

We were also growing silicon ribbon and producing solar volataic panels in the 70's. The shackles have been off for the private sector for 40 years.

We have used windmills for long before many of you folks existed. Seems like we know how to make and use all of the components. The shackles have been off the private sector for a long time.

One of the major problems is the selfish consumer. His shackles have been off - he's had some free choices.

Another major problems is we have permitted our Government give our tax dollars to big oil thru tax breaks (research, investestment credits, depleption allowances, and on and on).

WE HAVE NOT DONE THE RIGHT THINGS;

NOT EVEN THE THINGS WE WERE/ARE CAPABLE OF DOING. BUT........... THAT ..........

Didn't stop France from going 80% nuclear.

Didn't stop Germany from going 40% solar.

Didn't stop Brazil from going 60% biofuel.

Didn't stop Switzerland (and many other European countries) from going electrified rails for people and goods, and even electric ferries (they put rubber tired hiway diesel busses on electrified rail cars for certain legs of their journeys).

Didn't stop Europe from building and using small economical cars, nor electric delivery vehicles, etc.

So where has the US been??

I guarantee you, without LEADERSHIP, we will not get there....................

We have had the techonologies; we've had the money; we've had the resoures; we've had our heads somewhere, like where the sun doesn't shine.

AND FOR THAT, THERE IS JUST TOO MUCH EVIDENCE!!!!!!!!!!!!!!...

[cjwirth]

All of the electric power we could ever want is not going to solve the liquid fuel crisis. There is not even a plan of how to build the infrastructure for electric trucks, freight trains, and tractors and combines. In addition, when the Interstates and power grid go out from a lack of oil/diesel for maintenance, that's it. No transportation of products, no food coming in on the Interstates, and no home heating, which needs electric power to operate. Read more here in a 50 page free downloadable report: www.peakoilassociates....

[nakedjaybird]

Just reading the peak oil abstract scares me enough to want to do a no-holds-barred development of solar and wind and any other alternataive energy, especially those that are readily available, forever available, and most of all, free.

I would be more interested in reading a full-blown pro-solar and wind document disclosing greatest implementation potential by eliminating all road-blocks with "time-is-of-essen... urgency.

Then we'd have something worth reading and doing. Much better than what you propose reading as a result of doing very little to prevent your situation by doing all the wrong things for the past 40 years. It's time to catch up, and it will be expensive. But it's cheaper and more certain than attempting to exploit oil, gas and coal. It's time for a Manhattan Project or Moon Program for the readily available, free, basically clean, simple and maintenance-free energy called solar and wind and some biofuels, at a minimum.

Remember, I'm only proposing that we stop wasting 70% of our crude consumption in moving goods and people by electricty (we are using only 30% of the useful enegy in that 70% - the rest is waste heat). And when we've done that, we'll be able and WANT TO stop wasting the other 30%.

[André Sautou]

Like Hirsh, a lot of ordinary citizens think that there will come a time when oil scarcity will hobble the economy so severely that the stock market will crash and that it will no longer be profitable to own any stocks, even energy stocks. There is no need to be an expert to understand that. You just have to remark that 1°/ economic growth is fed by the growth of energy production, 2°/ sooner or later energy production will reach a summit and then decline and 3°/ a stock market needing expansion to remain viable will obviously crash (or maybe have crashed already) when expansion reverses into contraction.