December 28th, 2014
in Op Ed
by Ryan W. McMaken, Mises.org
Peak Oil Was Nonsense, and the Ghost of the 1981 Oil Price Crash Looms
Oil man T. Boone Pickens was on CNBC this morning and brought up the early 1980s crash in oil prices as a possible example of what could be in store for the oil industry today. He notes that the number of rigs operating in the US in 1981 was cut in half 12 months later. He warned that oil producers in the US may be looking at cuts of 30 to 40 percent in oil production. I made comparisons to 1981 here.
In a normally functioning economy, there would be no reason to be overly concerned about such a development, of course. The problem we face today, however, is that financial institutions, flush with easy Fed money have become heavily invested in the oil industry - just as prior to 2008, financial institutions, flush with Fed money, poured money into housing. If the oil industry contracts, the losses will extend deeply into the financial sector and the other bubble industries that have grown up around the industry in recent years.
Overall, oil producers are doing what you'd expect - the oil price is falling - due to falling demand, so the more expensive operations are shutting down. That makes perfect sense. Yes, a lot of the more expensive operations were never really economical to begin with - they relied on cheap money (i.e., low interest rates) made possible by Fed printing - but not even the geniuses on Wall Street will forever throw money at an oil extraction operation that loses money. So, those operations will shut down until the price of oil increases again. Whenever that may be.
Another Nail in the Coffin of Peak Oil
And when will the price come back up? It's impossible to say, but one thing we do know is that the Peak Oil Craze of 8 or 9 years ago was complete nonsense. Search "Peak Oil" on Mises.org, and you'll find several posts from 2005 and 2006 debunking what was then the broadly-accepted theory that all the oil in the world was being used up, we weren't going to find any more reserves, and without solar energy (or some other economically unviable "clean" energy, we were all going to freeze in the dark .
And then, lo and behold, the oil of price went up, smart people figured out how to get oil in a variety of new ways. And now we have an oil glut - far more than is necessary to meet global demand.
In the Pickens video, the host notes what a "terrible call" Peak Oil was. And yet, there's good reason to believe that the Peak Oil mindset still infects investors who think that any day now, we'll tap into the last source of oil on earth the price will sky rocket. Any day now.