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Peak oil, $6 corn, $15 soybeans?
This week, I heard the first discussion about the concept of "Peak Oil", which is
the idea that oil production worldwide has hit its peak in 2006, and is now on
the downward side of total production. That could have some far-reaching
repercussions for the world's commodity markets, with some doomsday type
forecasts out there by well respected people.
Taken from Wikopedia, here is the definition and some discussion of "Peak Oil":
"Peak oil is the point or timeframe at which the maximum global petroleum
production rate is reached. After this timeframe, the rate of production will
enter terminal decline. If global consumption is not mitigated before the peak,
the availability of cheap conventional oil will drop and prices will rise,
M. King Hubbert first used the theory in 1956 to
accurately predict that United States oil production would peak between 1965 and
1970. His model, now called Hubbert peak theory, has since been used to predict
the peak petroleum production of many other countries, and has also proved
useful in other limited-resource production-domains. According to the Hubbert
model, the production rate of a limited resource will follow a roughly
symmetrical bell-shaped curve based on the limits of exploitability and market
Some observers, such as petroleum industry experts Kenneth S. Deffeyes and
Matthew Simmons, believe the high dependence of most modern industrial
transport, agricultural and industrial systems on the relative low cost and high
availability of oil will cause the post-peak production decline and possible
severe increases in the price of oil to have negative implications for the
global economy. Predictions as to what exactly these negative effects will be
If political and economic change only occur in reaction to high prices and shortages rather than in
reaction to the threat of a peak, then the degree of economic damage to importing countries will
largely depend on how rapidly oil imports decline post-peak.
The Export Land Model shows that
the amount of oil available internationally drops much more quickly than production in exporting
countries because the exporting countries maintain an internal growth in demand. Shortfalls in
production (and therefore supply) would cause extreme price inflation, unless demand is mitigated
with planned conservation measures and use of alternatives, which would need to be implemented
20 years before the peak.
More optimistic models, which assume a delay of peak production until the 2020's or 2030's and
assume major investments in alternatives will occur before a crisis, show the price at first escalating
and then retreating as other types of fuel sources are used as transport fuels and fuel substitution in
More pessimistic predictions operate on the thesis that the peak has already
occurred or will occur shortly and predict a global depression, perhaps even leading to a
collapse of industrial global civilization as the various feedback mechanisms of the global market
cause a disastrous chain reaction."
This is some pretty heady stuff, but the fact that it is being discussed at high
levels (even the US Congress) is a bit unnerving. With crude oil prices surging
to new highs and the confidence with which funds have been buying almost all
commodities (grains, energy, and metals), this becomes a scenario that is very
concerning to grain markets.
If oil prices continue to surge, it seems almost certain that grain prices will
need to go with it as the cost of producing grains will rise in turn. Key to
this determination is whether or not we have indeed hit "peak oil" production,
as there is some disagreement as to whether or not that occurred in 2006. If
so, its likely oil prices will continue to move much higher in the near term.
If "Peak Oil" is a relevant concept in 2006, it is not unlikely for corn prices
to hit $6 (about 3x the 2002 price level) and soybeans $15 (again 3x the 2002
price level) sometime in the next year. Already, wheat prices have hit about 3x
their 2002 price level. This is very scary to imagine that type of price
fluctuation, but is also very scary in that the type of change forecast by some
'experts' is actually even much larger, as the world economy is very dependent
on oil to drive our industrial system as we know it today. Modern agriculture
as we know it would also change, adjusting to the cost of high priced oil as
well. For more information on the concept of "peak oil", just google it on the
internet and you'll get more information than you may have wanted to know!
Ray Grabanski is President of Progressive Ag, a marketing and risk management
firm for farmers located in Fargo, ND. For questions or comments, or if you are
interested in more information about Progressive Ag services, call 1-800-450-
This week, I heard the first discussion about the concept of "Peak Oil", which is the idea that oil production worldwide has hit its peak in 2006, and is now on the downward side of total production. That could have some far-reaching repercussions for the world's commodity markets, with some doomsday type forecasts out there by well respected people.