Drilling for Broke?  

The Wall Street Journal's "Econoblog" has a piece on when peak oil will arrive from Econbrowser's James Hamilton and Robert Kaufmann of Boston University's Center for Energy & Environmental Studies. James again brings up the fact that oil futures don't show any price rises in 5 years time, and thus peak oil can't be upon us. I've never really understood this reasoning - all this shows is that oil traders don't have any way of judging when the peak will really hit (and there isn't any widespread agreement amongst the "experts", so this isn't surprising), so future prices are really just going to be the current price + the cost of carry (arbitrageurs will guarantee that). Robert's rebuttal of this idea is quite good.

James is certainly correct -- oil prices may not rise until the peak passes, and those price rises are critical for making the economic transition. I am less sanguine than James about the market's ability to anticipate the peak and price oil accordingly. Statistical studies of futures markets indicate that the price of oil in the "outer months" (six months or a year ahead) is not a very good "predictor."

In addition to the short-run economic and political complications, the market may not be able to anticipate the geology of the peak. Oil is a geological "accident"; therefore, most of the word's oil is found in a few giant fields in a few geological provinces. For example, the U.S. has more than 14,000 oil fields, but the 100 largest will yield about two-thirds of the oil ultimately produced.

Large fields can maintain a steady rate of production for many years and then decline steeply. The markets' ability to anticipate the timing and rate of decline is limited by the lack of transparency. Without SEC rules that define proven oil reserves, OPEC's estimates are mix of geology and politics. This uncertainty is critical because much of the oil produced between now and the peak (and beyond) will come from a few geological provinces inside OPEC nations.