Colin Campbell, an former oil-industry geologist now a trustee of the Oil Depletion Analysis Centre in London , has been predicting that oil reserves would hit their peak for almost 20 years. In 2004, he claimed the peak may have been hit, signaling the end of cheap oil. The numbers have certainly been in his side since, although his detractors, among them the U.S. Department of Energy, claim that technological advances will squeeze ever-more oil out of the world’s various geologies.
As The Wall Street Journal reported in 2004, “that this debate can occur points to a striking fact: Nobody really knows how much oil exists. More to the point, nobody knows how much can be gotten out of the the ground. Much of the oil lies in places with volatile politics, including the Middle East, Russia and Africa. Further complicating the calculation: Beyond the pool of conventional oil that the industry can easily extract today lie vast stores of hydrocarbons that, until recently, haven’t been thought of as oil. Among them: tar-soaked sands in Canada and oil-laden shale rock in places including the western U.S.”
Meanwhile, the crackpot, as the oil industry refers to Campbell, is being proven correct every day.
American and Israeli threats of bombing Iran over Iran’s on-again, off-again nuclear-weapons program have also triggered oil-price spikes. So has instability in Nigeria and the Caspian Sea, and the unpredictability of Venezuelan President Hugo Chavez, who country is the world’s ninth-biggest oil producer .
Of course, those predicting bubbles and bubble-bursts can be quite wrong. National Review, the conservative American magazine, asked as far back as 2004: “The oil price bubble: set to burst?” Prices had hit “an all-time high of $50 a barrel” that September. “Fundamentally speaking,” the magazine’s Frederick Leuffer wrote, “oil prices should today be in the high-$20-a-barrel range.”
The New York Times’ Paul Krugman, however—an economist—disputes the speculative bubble theory. “The only way speculation can have a persistent effect on oil prices,” he wrote in May 2008 , when oil prices crossed the $130 barrier, “is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling. But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.” In sum, you can take your pick: oil prices are high for a range of reasons, probably not all of them listed here, because just as no one really knows how much oil there still is to be extracted, no one really knows, in the end, why prices have gone up that much, that fast—or when and whether they’ll come down. That’s not oil economics necessarily. It’s economics, period.