Oil Prices

on Dec 18 in Oil Market, Peak Oil tagged by Trevor Hicks

I love this graph by Euan Mearns at the Oil Drum:

We get so used to seeing financial or other data graphed against time it’s easy to forget that other relationships may be more meaningful.  In this case, Mr. Mearns is making the case that the world is supply constrained in oil, the supply and demand curves are not linear everywhere, that we are in the vicinity of a steeply upward sloping supply curve.

The graph above does appear to show a fairly robust relationship between oil consumption and prices over the last several years.  It would be interesting to see what curves can be drawn to fit this data.  And for those wondering about my position on Peak Oil, I think this is the best summation, I think that the supply curve slopes upwards very steeply at today’s production levels.  That doesn’t mean production cannot increase, just that we better be prepared to pay dearly for even small ticks upward, constrained by the global recessions that will be triggered by price spikes.

From a personal financial standpoint I think this implies caution about energy investments.  Expect continued volatility, you better be nimble when you ride the price up to jump off before the next crash.  More important, pay close attention to how fuel efficient your car is, how far you live from work, school and shopping and how big a dwelling you want to heat and cool.  Regardless of what’s going on in the financial industry with interest rates, buying a large house in the suburbs leaves you vulnerable to spikes in energy costs.  Selling a house and moving is always a laborious and expensive proposition, even worse is that real estate prices will be depressed just at the time you are forced to sell.  Just make sure you have some income cushion if that’s the lifestyle you choose.  I have a big house in the suburbs, but you won’t see me “trading up” any time soon.