The world is running out of oil and according to Profit from the Peak by Brian Hicks and Chris Nelder, shortly oil production rates will begin their inevitable slow decline. The authors call the resulting scramble for energy sources “the greatest investment event of the century,” but is there a way for investors to profit? Official sources paint overly-rosy pictures of the amount of oil still available. The biggest reserves are controlled by Saudi Arabia, but the Saudis severely limit access to scientific information about these reserves. The authors painstakingly go through available scientific evidence and conclude that peak oil production world-wide is near despite official claims that at least 50 years of oil remain. Part of the problem with oil production is that as an oil field matures it gets progressively harder to extract oil, and the extracted oil has more impurities that take energy to remove. At some point, even if a field still has oil, it becomes unprofitable to ...

In his book, Twilight in the Desert , Matthew R. Simmons makes the case that Saudi Arabia’s oil production will soon peak as the most easily recovered oil is depleted. His extremely detailed analysis contrasts sharply with the Saudi assertion that they can satisfy world demand for another 50 years. Much of his technical information comes from Saudi technical papers that seem to contradict their public statements. Simmons provides mountains of technical information that amounts to circumstantial evidence that oil supplies are dwindling. However, as he points out, it is up to the Saudis to prove their claims about how much oil is still in the ground and how quickly it can be supplied to the world. Assessing the nature of oil fields and how much oil they contain is very difficult. As much as anything this could account for the seeming lack of reliable information about oil reserves. Even if we knew how much oil is in the ground, it’s not clear how much of it can be recovered economica...

With oil dropping down below $125 per barrel, we get a lesson on the dangers of extrapolating from recent history to predict the future. No trend continues forever. We’ve heard many predictions about oil prices over the last several months. Commentators have told us when they think a barrel of oil will reach $200, $250, and higher prices. However, these predictions are often based on little more than blindly extrapolating from recent price movements. Just because oil may have gone up $20 per barrel one month doesn’t mean that it will go up by $20 in each of the next 12 months. Such a prediction has to be justified by some sound reasoning to be worth anything. Oil prices may yet climb sharply again, but you can’t tell this by studying an oil price chart. If oil rises from $120 per barrel to $140 over the course of a month, it may be reasonable to guess that the price was close to $130 mid-month, but it isn’t reasonable to guess that it will be $160 at the end of next month. This i...

While driving for about 11 hours to bring my son home from university, I was struck by the fact that high gas prices don’t seem to have reduced the number of cars on the road very noticeably. You can’t tell much from one day, but I haven’t noticed much difference in day-to-day driving either. Gas prices have risen about 50% in my area over the last year and a half. Some days I imagine that there are fewer cars on the road, but other days I’m not so sure. It’s likely that more people are taking the bus, but the difference hasn’t been enough to shorten the duration of my commutes perceptibly. Either demand for gasoline is less elastic than I would have guessed, or the effect is delayed. Perhaps, even if gas prices were to stabilize at current levels, demand would continue to drop as people feel the cumulative pain of paying high prices for a long time. I had hoped that a small benefit of rising gas prices would be less congested roads. Has anyone else noticed a difference?

Oil prices are up to a record $117 per barrel. This has the obvious disadvantage that we’ll pay more to fill up our cars. But, there are advantages as well. High energy prices create a greater incentive to develop alternative forms of energy. We can’t depend on oil forever. We need other forms of energy, but they are expensive to develop. Higher oil prices increase the chances that other energy sources can compete. Investors will be more willing to sink money into alternative energy development. Another advantage of higher oil prices is that it will spur some businesses that consume large amounts of oil to become more efficient. Closer to home, higher gas prices cause some people to choose not to drive. This means that there will be fewer cars in my way when I’m forced to drive on the highway at rush hour. As we run out of oil, we need prices to rise to induce the necessary changes to reduce oil use and shift to other forms of energy. Governments may be tempted to change tax le...