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Peak oil or freak oil?

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Oil shocks

Published: June 28 2008 03:00 | Last updated: June 28 2008 03:00

Peak oil or freak oil? The current oil shock, with Nymex crude touching $142 yesterday, has as much to do with bad luck as geology. And, as usual with luck, man has largely made his own.

The central theme of this decade’s bull market in crude is little different from previous oil shocks: a change in expectations about future supplies. In other words, many think we have enough oil today but might not tomorrow. A series of largely man-made disruptions has fed that fear. In countries such as Russia and Mexico, resource nationalism has stifled investment in supply. Violence in Nigeria and Iraq has shut down fields. The Energy Policy Research Foundation estimates the world’s lost output of up to 4.5m b/d is the equivalent of twice the world’s effective spare capacity.

Whether the problems are below or above the ground, the result is the same: fewer barrels available. The distinction, however, is important – if only because humans, even politicians, can alter their behaviour. When oil prices are rising, producers have an incentive to keep markets tight. But, eventually, expensive oil encourages conservation, new investment and the search for alternatives. Meanwhile, protectionism breeds inefficiency. Russia and Mexico, for example, are taking steps to reduce oil taxes or attract foreign companies, respectively, to address stagnant or falling output.

The same point extends to the demand side. In the US, high oil prices prompt drivers to buy more fuel-efficient cars. Meanwhile, even if Asia’s drivers are becoming richer, they will never reach America’s currently bloated per capita usage of oil. Governments across Asia are already cutting expensive fuel price subsidies. Shocks are occasionally necessary to change human behaviour. High prices are painful, but will ensure the world does not run out of oil.

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