What's the deal with oil prices?
Most commodity prices are collapsing. Copper is down 18 percent from its February 2011 peak. Corn prices are off by a quarter since last summer. Natural-gas prices are half the level of six months ago. Yet crude oil, down from its April peak of $114 per barrel, has risen by a third from its October low of $76 to again flirt with the $100 mark.
On Monday, they dropped below $97 on concerns about the lack of a deal on Greek debt.
Some of the recent increase may stem from tensions with Iran. But much of it seems to be a general view that crude oil is a different kind of commodity that is in perpetual danger of being in short supply, given its essential nature in modern economies; the chronic instability of oil-producing countries in the Middle East, Africa, and South America; and the peak-oil thesis, first predicted by M. King Hubbert in 1956, that global oil production inevitably will dwindle.
I don't buy it. In fact, I think that human ingenuity, constantly improving recovery technology, and higher prices (if needed) probably make any current estimate of recoverable oil far too low – and too static. Actually, global production capacity will rise from 92 million barrels a day in 2010 to 110 million in 2030, forecasts Daniel Yergin of IHS CERA, a forecasting firm in Cambridge, Mass.
That 20 percent jump would more than cover the global rise in demand. Hubbert's peak oil followers tend to discount the idea that reserves are usually underestimated. The US Geological Survey says that 86 percent of US proven reserves are additions to original estimates.
Add in some significant new finds, including Petrobras's huge field off Brazil's coast, a large discovery off French Guyana, and Statoil's potential 1.5 billion-barrel oil field in the North Sea. Then there's the oil boom in North Dakota, which now produces more oil than OPEC member Ecuador.
Besides crude oil, a vast array of alternative energy sources are likely to substitute for petroleum, something the Hubbert's peak devotees seem blind to. Natural gas from shale is now being produced in such tremendous quantities by hydraulic fracturing ("fracking") that natural-gas supplies have leaped and prices have collapsed.
A year after the Japan earthquake and meltdown, nuclear power may not be in favor, but I think this is temporary. The Three Mile Island facility mishap in 1979 and the Chernobyl disaster in 1986 caused temporary but not permanent restraints on nuclear power. Canadian oil sands can be turned into petroleum. While the process is expensive, production is nonetheless forecast to double to 3 million barrels a day by 2020. Coal is plentiful in the United States and its dirty image may be lessened by new emission-cutting technologies.
I'm skeptical about renewable energy, such as ethanol, wind, and solar, mainly because they require so much government subsidy, especially problematic in an era of trillion-dollar deficits.
On the consumption side, increased mileage standards and higher prices encourage conservation. And with an increasingly service-oriented global economy, the amount of oil needed to produce a unit of global economic output fell 41 percent between 1980 and 2010.
I'm forecasting a serious recession in Europe as the eurozone financial crisis spills into the economy, a hard landing in China due to earlier economic restraint and weakening exports, and a mild recession in the US as consumers cut spending to adjust to their falling real incomes. With a sagging global economy, crude oil prices will fall, meaning Hubbert's peak is a long, long way off.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."