Prof Chris Rhodes

Prof Chris Rhodes

Professor Chris Rhodes writing in Scitizen has offered the idea that “Gap Oil” could or should replace “Peak Oil.”

It’s a concept that I could agree to, if the premise fit reality a little better. Professor Rhodes seems to like the idea that his thought of the “Gap Oil” label comes from him first, and I wish him luck with that. But.

Gaps, whether oil or any product is two gaps, one being the demand driving gap that offers more buyers than sellers can supply and second, the supply gap that is way more supply than the buyers can use. I.e. demand gaps push prices higher, supply gaps push prices lower.

In fairness, is could be explained other ways but for simplicities’ sake lets just let each excess, whether demand or supply do the price pushing.

If the world has, or could learn anything over the past year it’s that both kinds of market pressures taken to excess have bad effects, higher prices will crush economies and that price collapses can crush suppliers. It’s easy to see that a tripling of raw energy prices would devastate a wobbly economy built up over decades. Suppliers can be less affected as they only had months to settle into very high prices so carrying less of a commitment to expenses. What hasn’t been discovered is the true economic value of crude oil. We’ve gone from over priced to under priced in a matter of months and the spread isn’t just a few percentage points it’s a multiplier factor of 3 –4 fold than then a divider factor of 3 – 4 fold.

That’s not what one would call a healthy market for price discovery.

What isn’t going to happen is that those gaps disappear. Instead its likely that volatility will continue with longer time periods between peaks of high and low. What isn’t being said is that demand has just been shown to be much more elastic than the “experts” declared – pushing the price of oil off the proverbial cliff.

The next lesson that consumers need to grasp is that oil lifting, or pumping from reservoirs will not grow at the rates that demand can grow. Or let’s just say that supply cannot with high confidence stay ahead of demand. It is much faster to get the second car out of the garage, resume driving more miles or other ways to use more fuel than find, develop and expand fuel production.

In the early 1970s the major oil companies had control of massive reservoirs and National Oil companies or really governments barely had influence. By the end of the 1970s the nations of OPEC discovered that by banding together they could affect the price of oil. They could have learned then that price shocks were not good for one’s customers. It took almost thirty years to get a few years of higher prices only to have it blow up (down) again in 2008.

The “gap” Professor Rhodes hopes to sell seems tied to those estimates of things like population, oil use, reservoir use and so forth which while “true” are not facts yet and when we get to the moments of those “yets” the circumstances at the time are simply unknown today. It’s really easy to forecast, but forecasting approaches near certain fallibility at points in time further out for any subject.

So professor Rhodes gets halfway to a conclusion that makes sense, concern about those periods when supply cannot meet demand, igniting a big price run up. The solution is to do your investing into more supply, efficiency and conservation while the supply gap is large and prices are low. Just because fuels are cheap now isn’t a reason to relax, rather it’s a time to use those savings to reduce your demand and increase your supplies.

Professor Rhodes opens a door with the gap oil idea. And it does offer some worthy arguments to cast off peak oil as an idea with merit. Keep in mind that peak oil will be a reality someday, not that it matters. What matters is if peak demand meets peak oil, whether or not the peak is an all time high or not. If demand overshoots, which it likely will for a brief period, the oil price swings we saw over the past year and a half might seem small.


2 Comments so far

  1. Matt on January 28, 2009 9:13 AM

    Anyone else notice the USGS just upgraded the Bakken Formation in North Dakota by a factor of 25? Not 25 percent – but 25 times.

  2. Professor Chris Rhodes on February 17, 2009 2:08 AM

    The last two paragraphs here are precisely what I am saying… so we agree – yes?

    Peak oil will come; it will strike different fields and different nations at different times, thus shifting the seat of world power according to who has the most resources.

    The holding-off of investment in new exploration will in all likelihood lead to a “gap” between supply and demand when the economy picks up again, whether we have hit the literal peak or not.

    When the peak comes we have the ultimate gap, and a new world order (unspecified but guessable in nature) will occur.

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