Turn off the lights, sell the car, and start walking

The Wall Street Journal: Energy watchdog warns of oil production crunch

The sky is falling! We are finally at peak oil according to some people in Paris. It is amazing how these people are not going to get their report out till November, but as the market is going up they just have to get the news out before the market crashes. Do not worry, kind people in Paris, you are only 30 years late with the news–we were going to hit peak oil in the 1960s.

I have two gut reactions to this. The first relates to elasticity of demand. I am going to continue to drive my 300c with the hemi, but I just love the horsepower and I am willing to pay for it. I also do not drive that much due to always being on an airplane. My assistant who has a really nice truck and Honda bike (man, is that bike nice), is now taking the bike to work on nice days. Demand is dropping. Heck, scooters made the Wall Street Journal yesterday. China is going to have to face its controls on oil prices in the next year or so, and that is going to drop demand.

The second point is at $130 a barrel no oil or gas will remain stranded in the world. For example, there are huge fields in the high Canadian Arctic that will be developed. It is only $20-odd billion in capital expenditure, but at a price of $130 and let’s say $25 in operational expenditure per barrel, there is margin there. Just a bit of margin, but it does not take many barrels to pay back the huge capital expenditure.

Are we going to run out of oil? Yup. Is it going to be next year? Nope. And if prices stay high, we are going to get lots of new supply from odd places, and we are going to get more people out walking, which will reduce demand for gas.