Crude Oil: how high can it go? (19th century whaling as a model for oil depletion and price volatility)

Posted: June 3rd, 2008 | Author: Steve | Filed under: Peak Oil | Tags: Energy, Oil, PeakOil, resource depletion, whaling | View Comments

Whale oil production and prices (adjusted for inflation)

Ugo Bardi presents a nice example of Hubbert’s Curve in action, showing pricing and depletion for a resource different from crude oil: whale oil and bone in the 19th century.

Although whale is technically a “renewable” resource, Bardi explains that it behaved like a non-renewable resource because it was hunted at a much higher rate than it could be renewed. Even though whale oil and bone was nowhere near as crucial to 19th century life as crude oil is to 21st century life, there is a clear parallel between the pricing behavior of the two.

The conclusions that Bardi reaches is that prices will continue to rise, and along with this general rise we will see high volatility and fluctuations. These fluctuations are due to feedback loops and the slow response of the market. The market is no longer able to adjust quickly to fluctuations in supply and demand.

This James Kingsdalec article suggests several interesting factors that seem to support the fluctuation assumption: Global oil production is currently declining, meaning that there is noone to act as a swing producer, but in a few years we may see a surge of new oil from “megaprojects“. One interesting thing to note here is the lack of certainty of future oil production capacity, the implied use of heavier grade oil, and the delay measured in years. These things all add up to a very uncertain future.

One of the things we really need to be aware of, with this kind of volatility, are the inevitable periodic price declines. These declines may cause policy makers to herald the end of the oil crisis, when the reality is very different.