Are we about to run out of oil?
Oil may well be the commodity upon which modern living is most reliant. Without it, our modern economy would rapidly grind to a halt. An oil-free world isn’t something we’re likely to see anytime soon, but oil is still set to have a bigger influence on the global economy and investment decisions than it has in the past.
Rather than “running out” of oil, the more immediate problem is one of supply keeping up with demand. There are large amounts of oil still under the ground, but getting it out is becoming increasingly difficult and more expensive. Since the 1970s, annual oil discoveries have been diminishing, making new discoveries of “easy” oil less likely.
The point at which oil production reaches the maximum rate before starting to decline is referred to as “peak oil”. From that point on, production can no longer keep up with every-increasing demand. Although oil remains available, it becomes more expensive, and its increasing price becomes a threat to economic growth.
There is heated debate as to whether we have reached peak oil or not. Some oil economists argue that supply is constrained by lack of investment in exploration and oil infrastructure. Higher oil prices will attract new investment, they argue, resulting in new discoveries and ultimately to lower oil prices. On the other hand, a growing number of petroleum geologists, engineers and oil company executives are saying that all the easy oil has been found, and that we may have already passed the point of peak production. The recent history of oil prices, and the diminishing rate of new oil discoveries, suggest these pessimists may well be right.
If they are, the price of oil will continue to rise, and oil companies with good reserves of easily accessible oil will reap high profits. On the other hand, companies with a heavy dependence on oil may be badly hurt. However, sustained high oil prices will alter the balance between supply and demand.
As oil prices increase, alternative fuels become more attractive and start to compete for market share. Drivers switch to more fuel efficient vehicles or to public transport. A wide variety of companies may prosper in an environment of high oil prices, provided they can come up with ever more efficient ways of using oil... or of avoiding it altogether.
This presents a challenge to investors. Will the car of the future be powered by hydrogen or electricity, biofuels or compressed air? Whilst we can anticipate that the world’s future energy portfolio will be very different from today’s, it’s very difficult to predict exactly what the portfolio will contain.
Whatever the answer, it would seem wise for investors to think about the implications of peak oil, and to take climate change into account. Our collective response to that issue could be one of the biggest influences on future demand for oil and the development of alternative energy sources.
Sources:
Oil Officials See Limit Looming on Production. The Wall Street Journal Online, Nov 19, 2007
www.aspo-australia.org.au
http://en.wikipedia.org/wiki/Oil_reserves