Thursday, May 22, 2008

More on Oil

A buddy sent me this link to a presentation by Matt Simmons of Simmons & Company International. He is a peak oil theorist and fairly extreme looking through his presentation so like anything discount what he says but there were some interesting points. (Thanks goes to Andrew)

- If motorists all decided to top off tanks it would drain our gasoline pool in 2 to 3 days.
- Motorists and service stations running on 2/3 rds empty

I would discount this a little more if at the Berkshire Hathaway Annual Meeting Munger and Buffett did not sort of lead the slightest bit of credence to the peak oil pundits.

There are two outcome to all of this I think.

One is as I have said we are headed for a commodity bubble. As this stuff gains popularity you create massive hoarding which actually does create a supply problem (supply for where the products are actually useful). At some point this kills off economic activity and all that stored supply eventually floods the market. It provides supply for years to come depressing commodity prices. This is a 10 to 30 year cycle. Very long and very painful for everyone who uses energy on the way up and produces energy on the way down. It is psychological as much as fundamental. It is psychological that once the cycle starts on the upside people way overestimate the shortages and store way more than ever imagined and on the way down supplies are depleted beyond what they should be because the thought there will always be energy at very cheap prices.

The second outcome (and I have not bought into this yet) is that we really are at peak oil and total output will be declining for years to come. This also has happened before. When? What was the primary energy source in the late 1700 and most of the 1800s? Give up? Whale oil. This lighted the houses and factories of millions. We reached peak whales. Whales started getting depleted and prices soared and people were panicking on how the economy would run as it did before. You had a couple of depressions in the 1800s that never gets studied and talked about that was partly caused by high energy prices. What happened? A guy named Drake found a way to produce a new oil in Pennsylvania solving the problem and supplying a new energy source.

Nothing is new under the sun. Both scenarios have happened and will happen again. If we really are at peak oil a new energy source will come from somewhere. Capturing the energy of the sun. Or capturing energy from the separation of various compounds in saltwater (it is being studied). There will be pain under both scenarios for various parties. There will also be great wealth created by others.

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