In many ways, we owe much of our framework on the oil industry to M.K. Hubbert and his theory of peak oil.
But most people don’t understand Hubbert’s theory – which simply states that one type of oil will reach a state of maximum production, and then fall into decline.
The crux of the peak oil theory is intact. We have seen the production of light sweet crude oil peak. But that doesn’t mean that we’re running out of oil, nor does it mean that Hubbert’s theory is especially useful anymore – now that many, many other types of oil reserves are economical.
And I know I’m running against the grain now, but I don’t even believe that we’re doomed for ever higher oil prices – necessarily. I think we could see oil prices drop by 50% or more in the next few years.
I’m not saying it would be a good thing. It would probably mean that we’re in the middle of a recession, or some kind of global fiat currency deflation – or worse.
But it will also be the result of the huge investment we’ve seen flood the oil space over the past decade or so.
Hubbert’s dire peak oil prediction has convinced masses of investors to pile into oil companies – which partly explains why many of the world’s largest companies are in the oil sector.
My real fear is that people are investing with a certainty in mind – a certainty that by no means is set in stone.
Hubbert’s peak oil theory is somewhat useful for major oil companies and their geologists with major oil fields that are approaching decline. It’s not a useful theory for people who want to invest in most oil companies today, or especially people who are thinking of buying stocks or not.
But in any event, it’s dangerous to predicate major investment decisions on this kind of macro, popular belief. Plenty of people will make money in oil investments – even if oil drops to $10 a barrel. The question isn’t how – but who and when.
As an investor, you owe it to yourself to examine these types of assumptions closely – especially assumptions that are hugely popular and highly touted by the mainstream media.
You don’t have to look too far into the past to see examples of certainties touted by the media and even the chairman of the Federal Reserve, Ben Bernanke, that have turned out to be 100% false. The biggest and most obvious example being that house prices always rise.
Examine your assumptions – and throw out the certainties. Nothing is certain in this world.