“In this article I outline and analyse various explanations for why the price of oil has fallen so dramatically in recent months and present some considered but tentative hypotheses about what we can expect from the oil markets in coming years. I also hope to challenge the naive conclusion – drawn all-too-hastily in the mainstream media – that the drop in price somehow debunks the analytical framework of the ‘Peak Oil’ school...
Those who claim that the effects of cheap oil are ‘clearly positive’ are at best being simplistic and are at worst just plain wrong....
The fall in prices... undermines the oil industry by scaring off capital investment in an age when the costs of establishing and drilling new fields is relentlessly on the rise, due to declining energy returns on investment. Cheap oil therefore is likely to retard mid-to-long term production, setting the scene for a foreseeable mid-range supply crunch that will soon enough push prices back up. ”
Samuel Alexander's paper "The Paradox of Oil: The Cheaper It Is, The More It Costs" is an excellent review of modern Peak Oil thought. It's well worth reading both as a review of important concepts and for the impressive list of references at the end.
The paper describes what's sometimes referred to as the "Goldilocks Zone" for oil production - there's danger on both oil price extremes, the price can't be too low or too high, it needs to be just right.
Sure, there are some out there making bold claims that oil is going fall to $10 or $20. But oil producers are businesses. They won't just happily produce away regardless of price and profit. Just as investors won't continue to pump money into ventures that don't provide an adequate return on investment.
The cure for low oil prices is always low oil prices. Just as the cure for high oil prices is always high oil prices.
And remember to revisit Steven Kopits' talk from this time last year. If producers were having that much trouble at $100 oil, you can imagine how they're doing at half that.
