Peak Oil Theory and Its Effect on Commodity Investments

The concept of peak oil has generated much attention recently. Books have been written about whether the world is running out of the commodity, and proponents (and opponents) of this theory have hit the airwaves en masse.

This topic is a serious one, but unfortunately, folks tend to get carried away and start spinning tales of global gloom and doom. It’s important to remain level-headed when talking about this issue. Basically, two schools of thought have arisen.

The first school argues that the world has already reached peak production and that demand is going to quickly suck out what’s remaining of crude oil in the world. The other side argues that the world still has abundant crude oil supplies and that, through technological developments and other means, crude oil that wasn’t previously extractable will be brought to market. Both arguments have some merit.

First, crude oil is a finite resource and, by definition, is available only in limited quantities. However, people have been saying that the world is going to run out of oil since the first commercially viable oil well was discovered in Titusville, Pennsylvania, back in 1859. One hundred and fifty years later, the world still hasn’t run out of oil.

Does this mean that the world will never run out of oil? Of course not. But it does indicate that these calls have been made before and are likely to continue well into the future.

Many experts agree that completely running out of oil in the near future is an unlikely event. Think of it this way: The world isn’t about to run out of oil — the world is about to run out of cheap, high-quality, and readily available oil. The light, sweet crude oil that refiners prefer because of its high products yield is running low.

However, the world still has plenty of crude that’s of a heavier quality. Just look at Canada’s oil sands. This heavy crude isn’t preferred because of its low quality, but there’s plenty of it to go around for a long time. In addition, technological advances (such as horizontal drilling) are enabling previously unextractable oil to now be extracted.

Therefore, the oil fields are yielding more crude than ever, both in terms of percentage and on an absolute basis.

As an investor, you need to focus on the fundamentals of the market. Whether the world is running out of oil is a hot debate that garners a lot of attention, but panic isn’t an investment strategy. Even if the world truly is running out of oil, you still need to look at the market fundamentals and develop an investment strategy that’s going to take advantage of these fundamentals.

If history is a guide, humans can be extremely resourceful in sustaining themselves. If crude does run out, we’ll find alternative sources of energy. Because energy is necessary to human life, you can be sure that people will develop alternatives.

A move is already underway toward investing in alternative energy sources, such as wind and solar energy, as well as other, more abundant fossil fuels such as coal. This trend likely will continue in the coming years. As an investor, you need to go where the value is.

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