Peak Oil. What Is It And Why You Should Care?
February 23, 2009 – 5:13 am“Peak Oil” is the point where world oil production begins to decline. M. King Hubbert first created and used this theory in 1956 to predict that peak oil production in the United States would occur between 1965 and 1970, a prediction that was correct.
The theory, which is based on observation, states that the aggregate rate of oil production occurs up to a point (i.e. “peak oil”), after which the rate of oil production goes into a permanent and sometimes rapid decline until the source is depleted. Peak oil is about declining production rather than completely running out of oil.
The issue, or pending doom if you believe the hype, is that some experts believe we have already reached peak oil globally and that production will not be able to meet increased demand. Although new technologies are being developed to tap more difficult sources, based on current demand growth rates is unlikely that technology alone can make up for the anticipated shortfall.
Not all “experts” agree with the peak oil theory, and those that do still may not agree on when we will reach peak oil. Clearly even the causal observer has noticed that gasoline prices have been declining for quite some time, and the “experts” as always have widely differing opinions. If you listen to the talking heads you will hear equally good argments that oil is “going to $20 a barrel” or is “going to $200 a barrel.” Perhaps we should ask the random number generators of the world for a better opinion. 
What does seem straight forward, however, is that growing economies require massive amounts of energy. Although the global financial woes of late may be causing a decrease in growth and energy demand, when China and India continue on their growth trend it is likely that more good ‘ol fossil fuels will be more in demand than ever.
I’m not one much for speculation or investing in commodities of any kind. I’m willing to agree that a small part of your asset allocation could be placed in commodities, but overall I don’t feel educated enough on the movements of individual commodity pricies to even try to speculate in these areas. And this doesn’t even cover the fact that I’m an investor, not a speculator. Either way I think the informed investor should at least keep an eye on oil prices as a rapid rise will be a useful indicator for inflation/deflation and will affect the prices of a wide variety of good (i.e. your corn and soybeans require gasoline for transportation).
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