Apparently I touched some nerves in the weekend commentary over the impact of peak oil on the life of a U.S. consumer. I received several emails containing a tad bit of hostility over my predictions. This is good. If I forced you to think out of your comfort zone you now have a better chance of surviving.
This is the fifth chapter in a series I started last week and I had planned on this being the final installment. However, from the emails I received it appears I need to continue this for a few more days. You can read the other installments here:
1. What Will Really Happen in 2012?
2. Saudi Arabia Oil Production Has Peaked
3. The Reality of Peak Oil in 2012
4. The Boy Scout Motto Is "Be Prepared"
Knowing what I know if I had continued kicking the can down the road and not challenged readers to at least consider the possibility of peak oil's impact to your financial life I would not have been doing you a service. What is the point of subscribing to an information service that only wants to maintain a politically correct view and not sound the alarm when there is an iceberg ahead?
Several readers questioned the concept that home values would fall in response to rising gasoline prices. After the recession of 2008 home prices are already depressed but rebounding nicely. Why wouldn't home prices rebound after the arrival of peak oil? Good question.
First 2008 was a short-term financial crisis. While there was a sharp hit to the financial system there should be no lasting impact. Credit requirements may have changed and you will need to put more money down on a home but over the long run that would provide upward stability in prices.
By contrast the energy recession is going to be a lasting recession. With cheap oil disappearing and gasoline prices permanently rising there is a lasting impact on consumer spending, business spending, employment and consumer habits in general. Initially fuel prices will fluctuate wildly with highs and lows as we move across the undulating plateau of high demand, short supply, high prices and demand destruction due to price. There will be periods when prices will not be as high as others but the trend will remain higher and sharply higher at that.
With high unemployment for the next decade there will be fewer home buyers and definitely fewer who want to live in the suburbs. I believe this will pressure prices for years to come once peak oil arrives. That gives us 18-36 months for home prices to rise and create a selling opportunity for those readers who want to prepare for the future.
A couple of readers thought the government would not let fuel prices move to $5-$7 per gallon and they could cap the price to avoid consumer meltdown. I would hope the government will not go there. That is NOT the action to take but them governments rarely make the logical choice. Capping the price for fuel with oil prices moving higher simply makes it unprofitable for refiners and will create a fuel shortage. In a capitalistic democracy government intervention is never acceptable. In any type of government price controls have never worked. Venezuela has tried price controls on everything and as a result they have nothing. There is no food, no fuel and almost every service is haphazard including electricity, phones and water. Price controls do not work.
One person suggested the government would subsidize fuel costs to keep prices low. They subsidize everything else in the agricultural sector to some extent why not fuel. First because they cannot afford it. In 2010 the U.S. spent over $270 billion for imported oil with prices averaging about $80 per barrel. Since we import more oil than we produce this would be very expensive in an ever-rising price environment. With oil over $150 a year into the peak that outgo would rise more than $500 billion. The government is already overspending at the rate of $1.5 trillion a year. We can't afford to add $500 billion more just so consumers can continue paying $3 per gallon. Other countries around the world have been dumping their fuel subsidies because it was pushing them towards bankruptcy. Fuel subsidies don't work.
Another reader felt the government would tax the already demonized big oil producers and use the tax revenue to subsidize oil prices. In President Obama's budget he released last weekend he is already proposing raising taxes on big oil. They make an easy target and I could see companies being hit with additional taxes but that would only limit profitability not really bring down the price of oil. Remember, under the U.S. rules there is nothing that makes a company sell its products at a loss. If an oil company produces oil at $60 a barrel and they can get $150 by shipping it outside the U.S. the government can't make them sell it for $60 inside the U.S. We are a supply and demand society. The government may try but what they may end up doing is pushing more companies to relocate outside the U.S. borders. Numerous companies have moved corporate offices outside the U.S. in the last couple years. The U.S. already has the highest corporate tax rate so raising that rate will just push these very profitable companies away from the USA.
A couple readers complained they had passed the peak oil story along to their friends in the past and were ridiculed for believing such crap. Yes, OPEC and the IEA and EIA have done a wonderful job putting a blindfold on consumers. It seems that 99% of U.S. consumers believe the peak oil story has been created by the big oil companies so they can raise the price of oil. Most consumers believe oil companies set the price of oil. They don't even understand how the oil market works.
These rebuttals to peak oil normally take the form of the monstrous new discoveries like the Bakken or Brazil's Tupi discovery. They claim oil shale will be turned into trillions of barrels of oil in the future. Everybody has an answer because everyone has NOT studied the problem. It becomes an issue of sound bites and security blankets.
Consumers don't want to believe there is a problem. Therefore the news sound bites they remember are the ones that fit their bias. For instance, if I heard someone on CNBC claiming the market would go up next week because of the lunar cycle and the position of Mars and Venus I would immediately discount that prediction because I think the analyst is crazy. If I went on CNBC and talked about peak oil the majority of viewers would think I was crazy because everyone knows there is plenty of oil.
I never said we were going to run out of oil. That is not the case. That is not peak oil. The definition of peak oil is when we can no longer increase production because the easy oil has been consumed and the remaining oil is harder to produce.
The IEA believes we will produce 90 mbpd in 2012 and that is certainly possible. However, if 2012 is our peak at 90 mbpd we could still be producing 80 or 85 mbpd in 2020. Peak oil just means the peak in production VOLUME is behind us. The impact of passing the peak is that demand can no longer increase every year as it has since the early 1900s. Demand will have to decline every year to match whatever production might be. As depletion increases with the age of the fields the amount of oil produced will decline faster.
I have run out of space again tonight and I will continue this Q&A session on Wednesday.
PLEASE email me any questions and any proof or links that anything I have said it incorrect. Prove me wrong! I guarantee to print any worthy submissions and respond accordingly.
Forward this email to any disblievers and ask them for a rebuttal.
This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.
Subscribe to Energy Picks Newsletter
See a list of our closed plays from 2010 here: Closed Positions
The OilSlick Newsletter is based on the expectations for global oil production to peak and begin to decline in the 2012-2014 timeframe. This is called "Peak Oil." This is the point where global production of conventional oil supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Oil countdown clock is ticking and time is growing short. Peak Oil is coming, are you prepared?