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Peak Oil - Accurately Predicting Oil Prices & The Value of Oil [Dec. 13th, 2007|09:30 pm]
Aaron Wissner
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Two years ago, I presented on peak oil to a group of leaders in Grand Rapids. By this time, I had recognized that the trend in oil prices had changed, and had started on a steady increase. By plotting a straight line, I suggested that oil prices would achieve $90 to $100 per barrel by the end of 2007. Here is the actual slide that I used in that presentation.

Note the spot on the graph where the supply stopped rising from 2003 to 2004. There is almost no volatility in prices during this time, as the oil supply moved from an era of steady increase (1.5% per year) to one of plateau.

Here is a chart made with the same data set. See how the prices moved very close to one another.

Look at what seems to be the new emerging trend in the oil prices. The prices are now rising steadily, yet with a high degree of volatility.

Now let's move back into the present, to see the accuracy of the straight line projection.

The most important thing to note about the accuracy of this prediction from two years ago is that few, if any, others predicted this sort of a rise. Most of the official and respected organizations were predicting mild increases in the prices. Some were even predicting that the price would go down.

Matthew Simmons, who often presents on the concept of peak oil, has suggested that oil prices will continue rising, upwards to $300 per barrel. Recent news items have quoted others as predicting prices in the $80 to $150 range. The time scale on these predictions is important, but more illustrative is a simple chart that shows the trend.

Of course, one must be cautious about predicting the future. A caveat of "all other things remaining basically the same" may be necessary. In the USA, the collapse of the sale prices of existing home, the decline in the auto industry, the credit crunch, and the massive increase in both the U.S. debt and the money supply (M3, which is no longer reported) all point to a possible future where the global economy heads into a recession, which could have an impact similar to that of the oil crunches of the 1970's. It appears from the oil consumption charts that this led to an actual decline in production, and a similar fall in the price of oil.

One last thing to keep in mind. Oil is extremely undervalued. Mr. Simmons suggests amounts in the $300 range, but in actuality, oil is many, many times more valuable than this. This calculation can be worked out by determining the cost per unit of energy for raw human labor. Simply apply this same figure to the energy content of the oil, and that is a rough estimate for the actual value of the oil. This may seem difficult to comprehend, but the actual value of oil is somewhere north of $50,000 per barrel. Do the calculation for yourself, or read my earlier article (links below), which only considers the energy content of a single gallon of gasoline.

For an illustration of this point, imagine that a person, rather than driving their car 30 miles for repairs, had to instead, by hand, push the car 30 miles. Another example would be a steam shovel, with a skilled operator, is set to digging a big hole, but only has one gallon of fuel. Once the steam shovel runs out of gas, a normal person has to dig an equal sized hole by hand.

Back to predictions, there is no reason to think that the price of oil will attain $50,000 per barrel anytime soon. As supply and demand oscillate back and forth, (video) the price will inevitably rise and fall, but the longest term trend is oil will continue to rise, to levels currently difficult for most oil industry insiders and investors to comprehend.


December Series - Up to Date Analysis
Why are Gas Prices Rising?
Peak Oil - Oil Prices in an Era of Plateau
Peak Oil - Accurately Predicting Oil Prices & The Value of Oil
World Oil Production Extraction Supply Plateau Charts - December 2007
Oil Depletion Rate - Exponential Decay
Peak Oil Now? New Data Leads to Speculation -- Original Article that spawned the December Series

Energy Value of Oil, Petroleum, Gasoline
$3.65 per gallon? What a bargain!
Gasoline Prices - $13 per gallon
Gasoline Prices vs. Milk Prices vs. Value of Labor
Real Gas Price -- $1,400.00 per gallon, or two weeks hard labor

Supply, Demand, Price, and Inelasticity
Video - Gas Prices, Gas Gouging, Peak Oil, Elasticity, Supply Demand
Peak Oil - Inelastic Supply meets Inelastic Demand
Peak Oil, Economics 101, and The Worst Depression

Big Picture Series
Peak Oil and the Vision in the Mirror
Your Life or The Planet's? Battling Human Nature from Inside-Out
Peak Oil - Films to Wake the Sleeping!


Keep in mind that there are many different ways that prices are reported. The number that seems to have the most fascination to the media is the futures price of "US light, sweet crude", which hit
$99.29 on November 21, 2007. This is an absolute maximum market price, that only occurred for a very limited period of time. It probably represents a very small amount of oil (relatively speaking), and it was not the final sale of the oil, but a futures contract for the oil.

Given the data on the chart above, and following the past trend, the 12-month rolling average will probably not exceed $100 per barrel in 2008. Note, this is stated as a rolling average due to the extreme volatility. It would not surprise me if some futures contract sold for $200/barrel next year. It would also not surprise me that the spot price drop below $50/barrel. Of course, the impact of speculation on the market, the number of insiders that begin to understand peak oil, and many other factors could cause the prices to rise dramatically. So, the motto for oil purchasers should be "Hope for the best, and plan for the worst".

ToRead Stumbled-Upons