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Peak Oil & Mainstream Attention Reveals A New Economic Pattern

By Reggie Abaca, Published: June 11th, 2009 7:49 PM CDT

Look out everybody.  Suddenly, the mainstream media is talking about peak oil, as if they've been just as concerned all along.  This spells trouble for the world economy as it is a significant change in behavior from the mainstream outlets.

It is absolutely true and we've been saying it for years - oil production has hit its peak in most of the world.  In fact, it has hit its peak everywhere except for Iraq, Kuwait and the mother of all oil producers, Saudi Arabia.  On top of that, production expenses continue to rise as it becomes more and more difficult to drill for oil.  But even many of us who have been following these developments for years have been humbled by our reduced expectations of oil demand due to the economic collapse.  It seems that $150 crude oil (OIL) can turn around and destroy the world economy, which in turn significantly drops its oil demand to a point where we can suddenly be looking at $30 crude oil.

Now that oil has recovered to over $70, the media has suddenly woken up again.  And dare I say it, we may have created a monster.

This story has yet to capture the attention of the mainstream in America.  This story has scared us inquisitive thoughtful people for years.  But what happens when more Americans really know that, "it's running out," as Matt Damon's character said in the Hollywood movie, Syriana.

What happens is exactly what happened in 2008: high priced oil followed by an economic collapse.  Welcome to part two of America and the planet's new drama, the potential that investors altogether jump into oil for safety and take it up to a point where it once again cripples the economy and, ironically, reduces the demand for oil once again.  Perhaps we hadn't considered it before and this cycle, happening over and over again, is the future of how the world deals with its energy problem.  Oil goes up to high levels, the economy collapses, oil demand is reduced, blame for the economic collapse goes elsewhere and people downplay the previous oil run-up, followed by a slight economic recovery, and repeat all over again.  This would likely result in, at best, a long term stagnating economy which struggles to balance its demand for oil with a constant attempt to recover.

For those of us who were thinking of a simplistic straight up rise in oil prices, what the market psychology and underlying effects of our fears are telling us is that we will likely actually witness dramatic overreactions in the market, causing economic instability followed by underestimating the underlying problem, and then another overreaction.  So buckle your safety belts because it may be time for another dramatic overreaction for now.  If oil's true value is $100, for example, don't expect investors to stop there, not at least until the rest of the world economy begs for mercy.

Related: OIL, USO, USL

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