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Peak Oil And Runaway China: A Dangerous Combination Of Memes


Back in 2005, investors heard an endless chorus in the financial media around two memes: the end of oil, and the growth of China.

Oil production was supposedly hitting its upper limits. In 2005, the US Department of Energy published a study on the peaking of world oil production (.PDF) that stated:

Because oil prices have been relatively high for the past decade, oil companies have conducted extensive exploration over that period, but their results have been disappointing [….] This is but one of a number of trends that suggest the world is fast approaching the inevitable peaking of conventional world oil production [….] The world has never faced a problem like this [….] Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

The peak oil narrative was reaching a fever pitch around the same time as China’s “runaway growth” meme. A BBC report on “2004: China’s Coming Out Party” highlighted how China’s increasing appetite for oil was affecting global prices. Other articles made eye-popping comparisons of China’s cities before and after the country’s economic changes (decades apart). For instance, Shenzhen transformed from a sleepy fishing village in 1980 to a bustling urban empire by 2006. Shenzhen had grown at an annual pace of 28% per year during this 26-year period. Yes, you read that right.

The pair of memes led some investors to embrace the notion that oil supply was peaking just at the moment that oil demand was accelerating- a recipe for higher and higher oil prices. Then, we all marveled as the price of oil rose from $30 per barrel in 2003 to well over $100 by 2008.

In subsequent years, both memes were proven wrong. There was no “abrupt and revolutionary” oil peaking, and China’s energy demands would not keep growing forever. But higher oil prices created an umbrella of opportunity for capital formation, and much of that capital flowed into US shale oil projects.

Between 2009 and 2015, total US oil production nearly doubled from 5,000 barrels per day to just under 10,000 barrels per day, thanks largely to shale oil. The shale revolution, which took place because high prices stimulated investment and innovation, blew apart the notion that the world had reached peak oil. By the end of 2014, it became apparent that oil output would satisfactorily meet demand growth.

Blindly following popular investment memes is a recipe for disaster, and investors who convinced themselves that oil prices would remain above $100 per barrel were blindsided by the return of oil priced under $40 per barrel – even though it was a function of price signals directing capital investment as a normal part of the business cycle.

One person who correctly identified the business cycle as it played out was Amy Myers Jaffe, executive director for energy and sustainability at the University of California, Davis. “When I would talk about this boom and bust cycle in 2005 and 2007,” Jaffe said in a 2013 issue of The Planning Report, “people would heckle me off the stage because it looked like the price of oil was going to be high forever.” But time has a way of vindicating truth, and now her perspective looks quite prescient.

Jaffe will be sharing her views on current events in global energy markets at the 69th CFA Institute Annual conference in Montréal.

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6 Comments on "Peak Oil And Runaway China: A Dangerous Combination Of Memes"

  1. makati1 on Wed, 30th Mar 2016 7:43 pm 

    Loses any credibility when it states: “Between 2009 and 2015, total US oil production nearly doubled from 5,000 barrels per day to just under 10,000 barrels per day,…”

    A bit of proof reading would correct such a stupid error. Not to mention quoting a US propaganda source for ‘facts’.

    Yes, we live in exceptionally difficult times and there is no improvement possible. Only a faster and faster slide to the bottom. I am glad I have no family to raise, mortgage, car payment, credit card bill, etc. to worry about. Freedom is sweet. If you are not preparing to be ‘free’, I pity you.

  2. Davy on Wed, 30th Mar 2016 8:32 pm 

    I am glad I have family to raise, a small very low interest mortgage on a house my kids live in, no car payment but not afraid to have one, credit card bill paid monthly, etc. I am not worried about these things and others should not be if you are responsible and competent. Freedom is sweet? If your idea of being ‘free’ is being a bum, I pity you. The last thing I would do is desert my family. I will protect my family and will face death as needed. I am not a coward. I have no problem utilizing BAU to transition out of BAU. Anyone wanting no debt or payments is not leveraging his abilities. One must also consider a debt jubilee if life collapses. Remember the old USSR when people ended up with what they had physical control over in many circumstances. You can fantasize about life and you can live a real life. There is a difference. A 14acre farm in a 3rd world country is nothing to crow about for survival. It is a hard living for anyone especially an old man. I am not going to cut it down other than to say quit blowing smoke up peoples asses about farming and survival because your situation is not the only game in town.

  3. robert wilson on Wed, 30th Mar 2016 8:58 pm 

    I am reading The Oracle of Oil by Mason Inman. It is well researched and well written. I rank it with the all time best books on energy. I say energy because King Hubbert also developed expertise on nuclear power and solar energy. Hubbert discovered how fracking worked about six decades ago. He first contemplated resource limits as a college student during the 1920’s. He became involved with Technocracy during the depression years. He first did oil field work while going to college. After joining the Columbia Geology Department, he attempted to bridge the gap between geology and physics. Later he worked for the US Government and Shell. Hubbert was awarded the Vetlesen Prize, the closest equivalent of a Nobel Prize for petroleum scientists.

  4. sidzepp on Wed, 30th Mar 2016 9:41 pm 

    I was deluded back in ’05 when exposed to a peak oil website. I spent about twenty hours reading the well prepared material and became immediately hooked. About a year into following the site other topics, primarily financial appeared. A little later started appearing sale pitches for survival packages. About a year or two later the author of the site vanished into the wilderness to his doomsday refuge. It reminded me of Abbe Hoffman and his “Steal this Book.” It is capitalism at its finest. Taken any opportunity to make a buck.
    Despite the events so well depicted on the website to immediate doom and destruction, my mind was opened to the complex problems that face humanity. I don’t worry much myself, my wife and I are comfortable with adequate income. The worry is for my children and grandchildren and the realization that my generation led us to this morass and that no major efforts are being done to correct the problems (if that is a possibility).
    Where peak oil might not come for the next several decades or tomorrow is not the issue. The problem is we have a runaway economic system that is base on consumerism and continued growth in he GDP and focusing on environmental issues only threatens the existing status quo.

  5. charmcitysking on Thu, 31st Mar 2016 7:16 am 

    Mak, “Freedom’s just another word for nothin’ left to lose”

  6. makati1 on Thu, 31st Mar 2016 7:42 am 

    Charm, really? I don’t agree. Freedom is when you have total control of your life. Most never experience such personal power. Many never realize what they are missing. Self-reliance is a lost skill in much of the 1st world. Life is not meant to be easy. It is meant to be lived, be it for a day or 100 years.

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