Peak Oil and Reflexivity and Peak Oil

[phantom power]

Reminds me of Kunstler's thinking on what happens when the previous century's investment climate of "expecting growth" turns into an investment climate of "expecting contraction."

In financial markets (which include oil futures), reflexivity occurs when prices themselves influence the fundamentals and that this newly-influenced set of fundamentals then changes expectations, thus influencing prices. This process then continues in a self-reinforcing pattern until it has overshot equilibrium. Because the pattern is self-perpetuating, markets tend towards disequilibrium- where every outcome is uniquely different from the past. (This of course flies in the face of most everything I was taught at the University of Chicago Business School)

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Here is my 'participant' part of the equation of Peak Oil. These are not facts, but my opinions:

1)There will be extreme volatility in next 5 years in oil and gas prices. Not only day to day, but year to year. Awareness of possible flow constraints is now upon us, rightly or wrongly. This combined with the tiny size of energy commodity markets compared to investable dollars will engender large position sizes that inevitably will fall victim to the fear/greed/leverage trifecta. Attention to the oil sector guarantees increased volatility. Accelerating oil depletion of older wells and skyrocketing reserve replacement costs guarantees higher highs and higher lows...

2)The Peak Oil community (e.g. those who generally understand that oil production is either peaking now or will peak soon) will begin to bifurcate into two relatively disparate camps - a)the supply-side camp that understands the urgency but will try and address energy and resource shortage via technology, more drilling and alternatives and b)the demand-side camp who will see that no matter what the energy source, a new paradigm of how we live our lives will be the only satisfactory answer to the twin problems of peak fossil fuels and a growing population. Conversations between these two camps will become increasingly disparate and tense.

3)There will be an eventual slowing and ultimately a cessation of speculation in energy markets by non-producers. This is tantamount to a change in capitalism so I don't say it lightly, but already only 6% of world oil reserves are owned by public companies - the amount of dollars NOW dwarfs the amount of notional physical resources - if printing presses are turned on while resources deplete this disparity will continue to grow. At some point people like you and I won't be allowed to buy oil futures, which is only a short step away from nationalization of the energy industry (which is the case in most countries already).

Conversations and thoughts like these are meant to raise the bar of discourse on energy topics so when real policy discussions take place, either locally or regionally, people will speak a common language. There is a fine line in peak oil outreach - more awareness is needed to accelerate renewable infrastructure and kick-start efficiency and conservation measures - yet too much awareness might cause supply disruptions (hoarding) and make it difficult for oil companies to extend the time horizon that we have access to a large baseline of production, etc. As an editor on this site, I hope we are efforting positive change, but realize many of our readers are likely tuning in to know the latest details in order to improve their own situation, financial or otherwise. One of my concerns is when the pendulum swings back the other direction, and we head towards one of those 'higher lows', that the urgency of both supply and demand response will be lost. These are high stakes.

http://www.theoildrum.com/node/4100