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Tuesday, August 16, 2005

The Way of the Investment Class

An investment advisor/blogger (I believe) had this to say about Peak Oil:
The Last Word on Peak Oil

The title of this post is fecetious because I've never had anything to say about Peak Oil. I don't understand it, and somehow I don't see it being worthwhile to put in the effort to be informed, as I still imagine I won't understand it. If you wanna start looking into it, start here.

I only bring this up because a commenter on my earlier post said this:

The long downtrend is consistent with the peak oil theory. From the peak (whenever that is), this graph will continue as a mirror image with generally rising prices.

Two thoughts crossed my mind upon reading this: 1) Peak Oil theory better include the historical decline in the price of oil. After all, it's already happened, and it's pretty bad if a theory can't even correctly state the past. 2) If indeed the commenter is correct, and the rise in oil prices will be a mirror of the past, then we're not seeing the upward leg yet, as this latest sharp run doesn't look anything like the long slow decline (with occasional upward shocks) over the past 80 years.

And that's my last word (for now) on Peak Oil.
I posted the whole thing because it articulates a last gasp attempt at preserving the status quo, with a hefty set of blinders applied. The Stalwart desperately wants to use his standard line of reasoning on all things economic, but can't seem to pull the trigger and at least try to grasp the obvious. The whole post reads: I just don't want to know.

I seem to recall losing my shirt via the all-too-similar ignorance gambit on several investments of mine. Won't make that mistake again.




I saw a related post by the always interesting Barry Ritholz at the Pig Picture. He showed the same NYT graph:


Much like the commenter at The Stalwart's blog, I added essentially the same dime-store analysis:
Invert that plot and show Gallons/Dollar and you will see Peak Oil written all over it.

The peak in Peak Oil occurs at maximum global production which equates to inflation-corrected cheapest per volume delivered. This is essentially Gallons/Dollar. If it keeps going, we are seeing the backside of the peak, no two ways about it

4 Comments:

Professor Anonymous Anonymous said...

Why try educating these people?

Figure out a way to take the money they are leaving on the table.

9:51 PM  
Professor Anonymous A Stalwart said...

Thanks for the link, though I think you've missed my point. I wasn't suggesting that Peak Oil was hogwash, only that the commenter's reasoning was strained. And in fact I'm very concerned about oil supply and prices (it's my job).

Frankly I'm not a geologist, and I have a hard time understanding Peak Oil stuff.

As for your comment at the "Pig Picture" (real clever), that if you flip the graph, you're looking at "Peak Oil", well that's meaningless because you can't just flip the graph. In the meantime, oil (like every other product known to man), has shown a long steady decline in inflation-adjusted prices.

Thanks

6:11 AM  
Professor Blogger WHT said...

Honest, the Pig Picture deal was a typo. I like Barry's rants about the RIAA and other radio and record industry types. Are they the "pigs" that I am subliminally referring to?

"Inflation adjusted" in fact has probably become a meaninglesss term. Since oil itself pushes inflation and gas at the pump is heavily guvmint subsidized (see the recent Jan Lundberg post), you can't treat it just as a decreasing or increasing function and expect to find meaning in it. Instead, you have to look at change in slopes and inflection points.

11:45 AM  
Professor Blogger SW said...

"As for your comment at the "Pig Picture" (real clever), that if you flip the graph, you're looking at "Peak Oil", well that's meaningless because you can't just flip the graph. In the meantime, oil (like every other product known to man), has shown a long steady decline in inflation-adjusted prices".

Well, if you believe in supply and demand, flipping the graph is indeed meaning laden. There is nothing mystical or indeed even remotely difficult to comprehend about the concept of peak oil. It merely posits that there is a maximum production RATE at which oil can be extracted from the earth. And that, in broad general terms, that rate is usually achieved when about half of the resource has been consumed. Thats it. End of story.

So, if you believe in supply and demand one would assume that as the supply (the production capacity) increases the price steadily goes down. Until you reach the peak the price should be going down in real terms. As the word peak implies, you are now producing at maximum capacity. In other words there has never been more oil available than there is at peak. The problem is that as the word implies, it is all down hill from here!

4:00 PM  

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