Peak Cheap Oil Rears Its Head

This is a critical update on the Peak Cheap Oil front. 

Yes, I am talking about that tired old concept that was allegedly slain by American drilling ingenuity. It's back in the news… if you know where to look.

I remain steadfastly interested in the oil outlook because everything, and I do mean everything, in our exponential monetary and associated economic system is hinged upon there being more cheap oil next year than there was last year.

If there is not, then every single assumption of future growth being made by the globe's collective stock and bond markets is wrong.  What I mean by that is the 350% debt-to-GDP ratio being held by the OECD countries in aggregate, is a collective bet that the future will consist of very high rates of growth without any near or intermediate-term limits. 

Further, a stock market with a price-to-earnings ratio (p/e ratio) that ranges from the 20's (S&P 500) to the mid 80's (small caps) is explicitly pricing in lots of future earnings growth as the justification for today's prices. Because we sometimes need reminders to appreciate what ratios really imply, a p/e ratio of 80 means that an investor is willing to pay $1 today for a stock whose current earnings would require 80 years to accumulate that same dollar. 

Whether or not that company would return 100% of its earnings to an investor is doubtful and extremely unlikely, so really anybody paying 80 times earnings for a given stock is making just one explicit bet: that that company will grow earnings enormously in the years ahead. That is, an explicit bet on future growth is being made.

The same is true for anybody paying 20 times earnings…or even 10 times earnings.

Recent actions by oil majors adds further evidence to the claim that all the cheap oil is gone, and that our global society needs to prepare for much higher oil prices in the future. Or reduced supplies.  Either way this is an admission that the world is past the peak of cheap, high net energy oil.

The only thing that could delay a major rise in global oil prices within the next few years would be a serious retreat in the global economy that drops oil demand from current levels.