From Peak Oil to An Excess of Energy: The State of Global Energy

OIL: Barclays Bank  iPath Exchange Traded Notes Linked to Goldman Sachs Crude Oil Total Return logo
Barclays Bank iPath Exchange Traded Notes Linked to Goldman Sachs Crude Oil Total Return

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Everyone knows that oil production is declining. That it’s only a matter of time before Peak Oil forces us to find new forms of energy or battle over soil like Kevin Costner in “Waterworld.”

As usual, everyone is wrong.

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Data recently released by the Energy Intelligence Group shows that production of global crude has now outpaced the demand. Take a look…

While it’s never wise to get too excited about a single data point, this chart isn’t just a blip on the radar. It reflects serious shifts in the supply and demand fundamentals that have changed energy markets over the last few years.

Energy markets may have more moving parts than any other market out there. It’s a wide-ranging mosaic, but when you put all the pieces together, the picture is clear: nearly every measure points to supply outpacing demand for years to come.

Understanding Peak Oil, Supply and Demand

This article is the first in a series of articles devoted to examining recent developments that have rocked the ever-changing energy markets and brought the Peak Oil concept into question.

The Peak Oil bogeyman was first raised by M. King Hubbert in 1956. Hubbert developed a logistic model (which resembles a bell curve) that successfully predicted that U.S. oil production would peak in 1970.

Hubbert’s model gained traction and has accurately predicted the peak levels of production in other countries since then.

But, as in any model, when time scales get long enough the prediction power breaks down as new information becomes a part of the equation.

Hubbert’s curve is based on properties of the natural world, which are based on geology. In that sense, it works. But let’s look at a past example to see where it may break down…

Hubbert’s model would have accurately predicted Peak Whale Oil. But the model wouldn’t have been able to account for technology shocks. Once the unforeseeable means for using petroleum entered the energy economy, the path for whale oil was forever altered.

Just as they did then, new developments have rendered Hubbert’s curve ineffective, or at least delayed it by decades.

Many energy optimists think that technology will bring new sources of energy through solar, wind, or biofuels. Some day they may. For now, the real advances remain in the petroleum industry. Huge discoveries and advanced extraction techniques have changed the economics of drilling for oil and other petroleum products.

You can see the effects of this expanded supply in today’s oil prices.

Of course, the global economy has slowed, providing a short-term decline in demand, as well. I’ll dig into that much deeper next week.

On a weekly basis, I’ll consider all the factors of energy markets in deep detail to determine where energy prices are heading.

I won’t only be reporting the latest news, arcane drilling reports, or updates on different oil projects. I’m going to provide a context to understand what to do with the latest headlines, and how to strategize no matter where energy prices go.