Oil Prices: Speculation and "Peak Oil Theory"

Investors Business Daily has an interesting editorial this morning on some of the causes of the present high oil prices, Peak Oil: An Idea Whose Time Is Up.

Some analysts believe that investors who have swallowed the peak oil theory are pricing oil higher because they fear the world is running out of crude and permanent shortages are nigh. They shouldn't believe it.

The peak oil theory was popularized by Shell Oil geophysicist M. King Hubbert. He predicted in a 1956 paper that U.S. oil production would peak by the early 1970s and then decline sharply. The peak oilers — many of whom quietly want the world to run out of oil — say he was right. But they're missing some key points.

Yes, domestic output has peaked. But it peaked at a level 13% above what Hubbert predicted. And the peak wasn't followed by a falling-off-the-table decline. Output rose after a temporary slide.

The problem with "peak oil" is that it assumes that oil output would be down because oil is running out. That's not the case, especially with U.S. oil production. We have plenty of domestic oil - we're just not allowed to tap into it.

U.S. production is trending down again, but it's not because there's no oil. It's due to shortsighted policies that prevent the industry from drilling for the almost 100 billion barrels of crude known to be under Alaska's Arctic National Wildlife Refuge and beneath the oceans just off of America's coasts. It's because politics and political correctness block the development of Big Sky state oil shale fields, where as much as 2 trillion barrels of crude, by some estimates, sit idle.

It's possible that rather than falling for the peak oil theory, investors simply are considering the reality that Congress has done nothing to increase crude output, and that continuing on that foolish path will indeed bring shortages.

And total world output is actually growing - the International Energy Agency estimates that output will grow from a present 85 million barrels a day to 115 million barrels a day in the next seven years. And what about the question of just how much untapped known oil reserves are left?

Cambridge Energy Research Associates argues that the remaining global oil resource base is 3.74 trillion barrels. That's more than triple the peak oil estimate of 1.2 trillion barrels. CERA also has noted that output will not fall as quickly as peak oil alarmists think.

...By the way, this estimate doesn't even consider undiscovered and untapped oil fields. Nor are unconventional sources, such as shale oil, part of the equation.

The bottom line - high oil prices are being caused by our own self-limitation on pursuing domestic oil resources, coupled with commodity price speculation that drives prices higher and higher.

I wonder when Congress is going to investigate itself - and hedge fund oil commodity speculators like George Soros?