Putting a Ceiling on the Equilibrium Price of Oil

Modern chemistry will deliver ample and affordable supply for many decades.

“If plan A doesn't work, the alphabet has 25 more letters—204 if you're in Japan.” – Claire Cook

In late December, we published an article with an admittedly provocative title, “Peak Cheap Oil is a Myth,” in which we carefully built our case for believing that there would be more than enough oil for more than long enough. We put forth four simple arguments in support of our thesis. First, pessimists on the matter regularly underestimate the pace of technological development in the energy industry. Second, much of what makes our current reserves expensive to exploit relates to political choices, and the ruling elite who prevent the development of primary energy in much of the world today would be quickly wiped out of power in response to a true supply crisis. Third, the definition of oil used by doubters is far too narrow and should be expanded to include “any hydrocarbon that finds its way into a refinery.”  Finally, when measured in ounces of gold per barrel of crude (in other words, in a currency that cannot be debased), the long-term price of oil gives no indication of meaningful shortages on the horizon.

Still cheap

After publishing the piece, we followed it up with a rather enjoyable conversation with Adam Taggart of Thoughtful Money that we subsequently shared with our full list of over 200,000 subscribers. (Taggart recently moved to Substack, and if you have not yet subscribed, we would encourage you to do so here.) After watching the episode, our friend Brent Johnson of Santiago Capital warned us via private correspondence, “You are now going to experience what it is like when you start saying things no one wants to hear… LOL.” Perhaps we have been off Twitter for too long, but we must admit we were surprised by some of the vitriol thrown our way, even by a few who claim to be professionals. (We respectfully submit that if an idea expressed about energy causes you to descend into a public fit of vulgarity, that speaks most loudly about something quite apart from the idea.)

Among the more thoughtful rebuttals was one put forth by Chris Martenson of Peak Prosperity, who published a 36-minute video addressing some of our arguments on his wildly popular YouTube channel. In Martenson’s view, technology will not be able to outpace the decline rates observed in the Permian Basin, easy-to-access reserves are quickly running out there and elsewhere, and once US production rolls over, it will enter a prolonged period of energy shortage from which it will not be able to recover.

Martenson making his case | Peak Prosperity

We were quite familiar with such arguments prior to publishing—they have been around for decades and have become ever louder even as US shale operators continue to smash production records. In our opinion, such bottom-up analyses of rig counts, decline rates, and proven reserves all suffer from one fatal flaw: they ignore the awesome power of chemists and chemical engineers to force their will upon nature from the top. If the situation Martenson predicts ever did come to pass, this insurance policy of last resort would quickly be cashed in, leveraging one rarely mentioned technology, commercially proven and ready to fill the gap, whose wide-scale deployment would forever allay any fears of permanent hydrocarbon shortages. So confident are we in its potential that we believe its existence allows us to estimate a ceiling on the long-term equilibrium price for oil.

What is this decisive technology and how quickly could society broadly pivot to its use? Let’s head to the Middle East and find out.