Monday, December 18, 2006

Energy

I'm not in the peak oil camp. As a matter of fact, I'm strongly anti peak oil. These record energy prices are giving huge economic incentives for greedy corporations to find new reserves, and they are indeed finding them. Inventory levels around the world are high and growing while demand is starting to fall. One analyst I follow said this morning that demand appears to be growing at a level 40% below his estimate. Ouch! No wonder OPEC is cutting production. An inflated oil price + high reserves + weakening demand = correction to me.

There are a lot of misconceptions about the energy market. For example, OPEC does not set the price of oil (duh!). They can certainly influence it, but ultimately the price is set by traders in the futures market. With the peak oil theory floating around and solid returns over the last few years, hundreds of billions of dollars have poured into energy markets which has caused a bubble in the price of crude. At these price levels, OPEC is actually losing market share to non-OPEC producers because of growing non-OPEC supply.

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