Jan Lundberg on Peak Oil

A link to the rest of the piece is here. (hat tip: peakoil.com)
Jan Lundberg, veteran petroleum analyst who joined the environmental movement and fought industry expansion, has a different explanation for record gasoline prices than the one provided by his former firm, Lundberg Survey, which on Aug. 14 attributed them only to high crude oil prices.

"The peak of world oil extraction is approximately now, although reserves data from the oil industry and OPEC are notoriously unreliable. Shortage of crude oil has started to make itself felt, as strained production levels of the most useful crudes reflect tight supply. It is true that oil demand has managed to reach record levels (82.2 million barrels a day; source: IEA), but oil fields inevitably peter out," he told Fox News Radio on Sunday.

Lundberg also told Fox News that it is erroneous to calculate that the adjusted price for gasoline, including inflation, is under the price of two and a half decades ago. This is because "subsidies - direct, indirect and hidden, such as the War on Iraq -- to oil and refined products, if included in the price, would make oil cost perhaps $120 per barrel today. This is one reason people must work longer hours and obtain extra jobs," he explained.

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I don't know about Jan...I seem to recall that he predicted an imminent collapse (as in within a few weeks) of our economy many months ago. The guy just can't seem to wait for misery.

I'd like to see where he gets that $120 number. There are a number of subsidies to oil use, but many have been in place for a while, and others seem silly to tack on to the oil price wholesale.

I've met Lundberg once or twice - I used to live in Arcata, CA, and so did he. I attended a few Y2K meetings there before deciding it was going to be a non-issue. He was really into the idea that Y2K was going to be bad. He's pretty extreme and has been for a long time. OTOH, you could argue he's just seen further into the future than the rest of us, and that's what's radicalized him.


has a profile.

In this piece:


he argued that stock market panic would cause prices to go so high that the economy would collapse "within a few days". To me, that's outside the range of plausible scenarios.


Not so fast. I think that psychology is a primary driving force of the market. And panic is precisely what causes market meltdowns. The dawning realization of our true energy situation has the potential to turn into just such a panic inducing market event where everyone runs for the exists at the same time. Irrational behavior is inherently unpredictable and therefore placing a bet on exactly when or even if such an event will occur is not exactly prudent. But it is a very real possibility and I think it goes a long way towards explaining some of the numbers coming out of the EIA against all logic.

It is interesting to read these demurrers, because just last week I removed Lundberg's site from my favorites. You can't read everything, and Culture Change just didn't make the cut. When I read that he was being interviewed by Fox News, I wondered if they were setting him up as another patsy opponent, a peak oiler that is easily dismissed as a whacko.

The National Defence Council Foundation estimated last year the cost of gasoline to be around $5.28/gallon, this includes the following factors:

* Almost $49.1 billion in annual defense outlays to maintain the capability to defend the flow of Persian Gulf Oil – the equivalent of adding $1.17 to the price of a gallon of gasoline;
* The loss of 828,400 jobs in the U.S. economy;
* The loss of $159.9 billion in GNP annually;
* The loss of $13.4 billion in federal and state revenues annually;
* Total economic penalties of from $297.2 to $304.9 billion annually.


And this just in from
(hat tip to Flying Donkey)

This does not make logical sense:
""It is clear that there is no shortage of crude," the Saudi source said. "We have said all along that the market is higher because of limited refinery capacity and now the market is worried about Iran."" ... ""Basically, our production is not going to change," the source said. "We will supply whatever the market wants.""

If the input side of refineries is backing up, should not crude prices drop ... even if refined gasoline prices go up? Does not compute.

Also, the market "wants" 85mbd. Is Saudia Arabia going to provide all that the market "wants"? What kind of double talk is this?


Yes, the refinery bottleneck is often blamed for driving crude prices up, and no, it doesn't make sense.

If refineries cannot produce enough gasoline, and supplies of crude are ample, it should result in a gasoline shortage (with higher gas prices) and a temporary crude oversupply (keeping oil prices at least stable, or allowing them to drop).

In psychological terms, it may be an attribution error. Yes, there's a refinery shortage; yes, crude oil prices are rising; therefore I conclude that the refinery shortage is causing crude to go up in price. It's flawed logic.

There is one alternate explanation that needs more data to assess. Many refineries require light, sweet crude, and can't process the heavy, sour OPEC crudes. If there is an undersupply of light sweet oil because refineries can't process the more abundant heavy sour oil now being pumped, then refinery limitations will cause better grades of crude to rise in price. In this case, it's the refineries' finicky eating habits that cause the oil to rise, not their throughput capacities per se.

"Stocks have reached what looks like a permanently high plateau."
Irving Fisher, Professor of Economics, Yale University, October 16, 1929.

"Whatever happens, the U.S. Navy is not going to be caught napping."
Frank Knox, U.S. Secretary of the Navy, on December 4, 1941.

"It doesn't matter what he does, he will never amount to anything."
Albert Einstein's teacher to his father, 1895.

""It is clear that there is no shortage of crude...we will supply whatever the market wants." Saudi source.

This is a bit off topic but I picked up an anti peak oil piece (nod to Peak oil for link) http://www.lewrockwell.com/featherstone/featherstone37.html
that takes the position that high prices are speculative this summer. The writer uses the futures prices out to 2011 not being above $66 to justify this statement. He invites (and ridicules) all believers in Peak oil to invest in the market if they are so confident of a peak.

I believe this has been covered by TOD a number of times but can someone comment (Dave perhaps) why traders don't have a linear price increase to $100+ in a few years?

My first thought is that traders, even if they understand peak oil, will not commit that far out because at some point high prices might slow economic growth (recession?) and lead to the infamous demand destruction thereby increasing supply and lowering the price. But I have no idea if this is how traders or markets work.

Can someone shed some light on this? Even to the point of a new thread discussing how far out the Futures market is accurately identifying price increases? Were they accurate 12 months ago in setting the price for June- September 2005?

This seems to be another piece of the puzzle that is used by both sides when it suits them.

Mr. Featherstone, the author of the Lew Rockwell article doesn't appear to know much about oil.

It would be easier to take him seriously if he had correctly identified Hubbert instead of 'Hubbard' as the man who first discussed peak oil.

Also he said:

"I've heard peak oil estimated as soon as November, 2007"

but the famous Kenneth S. Deffeyes has said that the peak will be Thanksgiving day 2005.

I couldn't get past these two blunders.


I looked into this question of futures prices a few weeks back when Econbrowser discussed it at length. At that time, futures were in contango (oil was slighly more expensive in future than now), whereas right now oil is slighly cheaper in the future (but still over $55 out to 2011). Basically, JDH pointed me at several papers which showed pretty clearly that oil future prices have no information about the price in the future that isn't already reflected in the current price. In other words, if there's a foreseeable shortage in the future, it is *immediately* reflected in current prices. The historical data is completely compelling on that point (and the economicists have theoretical arguments for why this must be so - if oil futures are much higher than current prices, you can make a lot of money with no risk by just storing oil, meaning the cost of storage, insurance, interest rates on the capital, etc sets a limit on how much more oil in the future can be compared to oil now). So the price today pretty much reflects the markets best weighted guess to date as to what is required to get through the next few years.

My take is that the market is currently just going up to the point where it stops further demand growth. The fact that the futures prices is now slightly lagging the current price to me suggests the market thinks it's getting close to the price that will do the trick (absent new developments), perhaps because the developing countries are starting to visibly hurt. I don't think depletion is priced in yet, because I don't think there's any real visibility into when and how fast depletion is going to happen.


"So the price today pretty much reflects the markets best weighted guess to date as to what is required to get through the next few years."

The problem there is apparent when you compare the best weighted guess today to the best weighted guess last year.

The best weighted guess is volatile and not particularly accurate.

2011 is a long way out, and my (quite limited) understanding of dealing in futures is that one would pay an option price now. However, PO predicts large societal change, possibly catastrophic. Why would I want to invest resources now in a system that I can't even be sure will be around?

Furthermore, PO won't likely have an exact peak, but rather a wobbly plateau as oil decline of old wells continues, but smaller new wells come on line. This means that there will be a wobbly plateau. In the wobbly bit, price will be volatile (such simple sounding words, "correction" "volatile" ...) to say the least.

Along with the volatile prices, our fiat money system is essentially based upon work/energy/faith. Possibly it could even be said that our money system is based upong *continually increasing" work/energy/faith. Now, when cheap oil isn't around, there will be a lot less energy in the system which will cause people to lose faith in the system. Adding to that the high price of oil will shut down some businesses that depend upon cheap oil, so there won't even be as much employment.

Not being an economist myself, I can't guarantee that these conditions will lead to inflation (consider how the banks would feel of 10x or greater inflation with all the consumer debt they're carrying. Now consider who one on the latest round of bankruptcy legislature, and who the money policies tend to work out for). Maybe instead there will be deflation. Maybe we'll return to the days where a nickle *can* buy you a cup of coffee. In times like that, maybe oil will only be $90, even if those dollars are more relatively powerful than in today. (my understanding of dealing in the futures market is you're essentially gambling against what the price will be, and specifically future dollars will be used (I.E. I don't think that I could pay 60,000 of today's dollars and take delivery of my 1,000 barrels in 2011. Instead I'd be a premium for the option of buying oil at a certain price in 2011, and then in 2011 if I exercise my option I'd pay in 2011 to take delivery, or sell/trade the option to someone who actually has a storage system to take delivery of the oil. Please, feel free to correct or elaborate on what I've said.).

While there were signs leading up to Black Tuesday, it is good to remember that it was Black *Tuesday* and not Black *1929-1931* . Yes, trading continued after Tuesday, and yes, Tuesday was a consequence of Black Thursday, but specifically Tuesday was people reacting to Thursday. In a few days the damage was done and many people were irrecoverably hosed. There was large equity debt in the family farms and many people lost their farms to the banks. Now there's large equity and personal debt. The stock market implicitly seems to be built upon the faith of continued growth, which implicitly is built on cheap energy right now.

If you're betting on instabilities of "the system" (I.E. PO), in my mind it really doesn't make sense to bet within the system. Certainly not on something which is arguably quite fundamental to the system.

coffee -

I wouldn't be betting on anything in a controlled market. Ergo, I do not bet. But no controlled market has ever survived much longer than a generation anyway.

Current growth is NOT sustainable - it doesn't take much reading and very little dot-connecting to understand that. So, wither the markets long term?

IMO, stocks are nearing what looks like a permanently high plateau....


Actually, much of the losses of Black Tuesday were made up pretty quickly, and then stocks continued to go up and down but more down than up for several years. The market didn't bottom out until 1932. See


for a graph.

For those who believe civilization will collapse, this is definitely not priced into the market (ie it doesn't agree with you - no surprise).

Michael: Yes, prices are volatile, the future is uncertain, and in particular, the *futures* price is very little better a predictor of the *future* price than the current price (because information about future shortages immediately affects the current price). We don't know exactly when peak is or how fast global depletion is on the back side, and so those things aren't priced into the market yet. At least that's my opinion.


Stuart, thanks for the info. Now, I'm remembering a bit more of highschool history. It's at least a bit comforting to see that altho there were some some quick changes in a matter of days there was at least some time to try to make a change with things operating approaching normal.