Helping America Navigate a New Energy Reality

Peak Oil and Runaway China: A Dangerous Combination of Memes

By on 28 Mar 2016 in notable posts, viewpoints

Oildanger

(CFA Institute) Back in 2005, investors heard an endless chorus in the financial media around two memes: the end of oil, and the growth of China.

Oil production was supposedly hitting its upper limits. In 2005, the US Department of Energy published a study on the peaking of world oil production (.PDF) that stated:

Because oil prices have been relatively high for the past decade, oil companies have conducted extensive exploration over that period, but their results have been disappointing [….] This is but one of a number of trends that suggest the world is fast approaching the inevitable peaking of conventional world oil production [….] The world has never faced a problem like this [….] Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

 

The peak oil narrative was reaching a fever pitch around the same time as China’s “runaway growth” meme. A BBC report on “ 2004: China’s Coming Out Party ” highlighted how China’s increasing appetite for oil was affecting global prices. Other articles made eye-popping comparisons of China’s cities before and after the country’s economic changes (decades apart). For instance, Shenzhen transformed from a sleepy fishing village in 1980 to a bustling urban empire by 2006 . Shenzhen had grown at an annual pace of 28% per year during this 26-year period. Yes, you read that right.

The pair of memes led some investors to embrace the notion that oil supply was peaking just at the moment that oil demand was accelerating — a recipe for higher and higher oil prices. Then, we all marveled as the price of oil rose from $30 per barrel in 2003 to well over $100 by 2008 .

In subsequent years, both memes were proven wrong. There was no “abrupt and revolutionary” oil peaking, and China’s energy demands would not keep growing forever . But higher oil prices created an umbrella of opportunity for capital formation, and much of that capital flowed into US shale oil projects.

Between 2009 and 2015, total US oil production nearly doubled from 5,000 barrels per day to […]

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  1. Conrad Maher says:

    The production got up to 75% of US production capacity of the late 1950’s when the US demand for oil was about two thirds of the production capacity of over 12,000,000 b/d. In 2014 the production capacity of the US neared 10,000,000 b/d day with the demand near 19,000,000 b/d. We continued to import more than 9,000,000 b/d of oil and oil products. Way too much of the investment in the high cost production from source rock was from investors searching for income in a near zero interest income environment. The number of bankruptcies in companies producing ‘shale’ oil and natural gas shows the extent to which these investors were sold over hyped projects where the risks were not understood and were intentionally understated to investors who did not do enough do diligence.

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