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Peak Oil Fears Are Not Translating Into Higher Oil Prices

By Reggie Abaca, Published: February 11th, 2009 10:56 PM CST

The talking heads on television are leading an overwhelming chorus of opinion that says, "this financial crisis was caused by loose lending practices."

But what caused loose lending practices?

The answer will be obvious to those who specialize in risk assessment.  Overall loose lending practices are caused by a loose belief that overall growth is inevitable.

And here comes the fringe peak oil crowd warning of doom and gloom when it comes to that myth of infinite growth.  In fact, the crowd can even now prove that cheap oil production has likely peaked in all but three countries in the world: Kuwait, Iraq and Saudi Arabia.

The immediate assumption is that this should cause oil prices to go up.  But hold on to your hats, crude oil prices have actually collapsed.

To understand this, one must go back to 1980 and investigate production and consumption reactions to weak economies.  According to the United States Energy Information Administration, consumption dropped 7% from 1980 to 1983 and did not recover until 1987, where consumption rose consistently until now.  During the period from 1987 to 2007, consumption rose about 36%.

On the production side, in the period from 1980 to 1983, producers managed to drop production at an even greater rate of demand, by 11%, suggesting that there was significant flexibility at that time.  However, in that same period from 1987 to 2007, production rose only 29%, suggesting that production has not kept up with demand since then.  This is despite America’s increased influence in countries such as Kuwait.

The long term picture shows a production rate that will ultimately not keep up with consumption at the current rate.  The short term picture should remind us of the period around 1980, where a temporary loss of yearly demand caused a multi-year fall in oil prices.

But the pundits have lost the irony in all this.  It was clear around 1980 that there was an “oil crisis” which helped cause an overall financial malaise.  Today, it has been particularly lost on the crowd that soaring oil prices was what began this entire crisis to begin with.  $150 oil put the brakes on economic growth and ultimately led to a financial catastrophe.

Today, as a result of worldwide deflation and an economic slowdown, oil demand has dropped and may continue to drop as long as the economy remains weak.  Crude oil prices could continue to stay low and cause an even greater apathy when it comes to peak oil energy concerns.

Meanwhile, if production quietly peaks in Saudi Arabia, the next time oil demand rises – however distant that day may be - the world will finally come face to face with the reality of permanent expensive crude oil.

The lesson here is we may still have years before oil prices rise once more and that becomes a reality.

Related: OIL, USO

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