Sustainable Energy Transitioner

Something dramatic happened this past week. For many months futures markets saw the current rise in oil prices as a temporary event, a bubble even, that would fall back to reality below $65 per barrel. The price of oil would increase for the month immediately ahead, but the futures market out to 2016 would show a gradual fall. Then in 2008 the price many years into the future came toward parity. If the price was ~$125 per barrel in June 2008, then the market would guesstimate that it will be ~$125 in December 2016. But this past week, supply concerns beyond 2010 came into focus and when the price hit $135 per barrel for June 2008, the 2016 price jumped up past $145.

The IEA has been getting more and more gloomy these past several months. After naysaying peak oil for many years, their Chief Economist Fatih Birol is now urging its developed member states to “leave oil before it leaves us.” He points to a supply shortfall by 2015 of 12.5 million barrels per day. Such a shortfall is more than twice the shortfall created by the Iran-Iraq war and would almost certainly create $300+ oil and $10 per gallon gasoline in the US. The market currently does not predict such high prices, but it does predict prices to increase. I tend to believe people who put their money where there mouth is a lot more than some analysts who cling to the past in their projection of $50 per barrel oil. Right now, these markets are predicting oil’s price to rise slower than most average discount rates around 5%. And if markets continue to price oil higher in the future, rising as high as the discount rate even after calculating a demand response to supply constraints, we will know that the market is a full believer in peak oil (whether it is all geologically induced or because of politics). For oil to fetch such a price in the future could lead economically rational firms to withhold production today for higher prices in the future, a sort of hoarding that could wreck our economy.

Bottom line: Rising oil prices are no joke for net importers. Peak oil is no longer a belief of a few nutty internet bloggers, but is being considered by the most relevant energy agency in the world, the IEA, and is starting to be priced into the futures markets. If net importers don’t free themselves of their addiction to oil then decades of hard work to increase the economic well-being of its citizens could be negated in a matter of months.