Earlier today, my colleague John Carney wrote about new revelations about peak oil that have recently come to light through Wikileaks. I spoke with Bradley Schaeffer, CEO and co-founder of INFA Energy Brokers, to get his perspective on oil prices.
Traders are busy—so when you get one of them on the telephone during trading hours you need to talk fast. My first question to Schaeffer was straight to the point: "What's going on in the energy markets with all this news of peak oil floating around?"
"Apparently not much is going on—and that's kind of your story." he said.
The market hasn't moved much today on the news: "You're looking at a 1/2 percent move to the upside in crude oil."
He also went on to tell me that this particular account of diminishing reserves, reported by Al-Husseini in the Wikileaks document, has been floating around since 2007.
And the notion of peak oil was first suggested as far back as 1956 by a geoscientist named Marion Hubbert—so the idea itself isn't exactly breaking news.
As Schaeffer explains, the relevant supply of oil isn't based on total reserves but on recoverable reserves. And recoverable reserves are based on the economic feasibility of extraction. Which means that the supply curve builds in a self-correcting mechanism: when prices rise it becomes economically feasible to go after oil that is more expensive to recover. And new technology is—and will continue in the future—to increase our ability to extract oil in more cost effective ways.
All that said, Schaeffer is still long crude—but for structural economic reasons.
"I don't think this is an impending catastrophe—I just think it's one more reason to get out of the way… It's one more bullish reason—let's just throw it on the pile."
In fact, Schaeffer thinks oil prices could jump a lot higher because of increased economic activity—and also because of the potential for inflation in the United States. (Dollars are the currency in which oil is denominated, so price inflation in the United States would push oil prices higher in nominal dollars.)
Schaeffer believes prices could spike to $150 a barrel. That represents a 50 percent increase over where prices are today—currently flirting with the $100 per barrel mark.
Of course, in a globalized world, consumption isn't just coming from the United States.
Schaeffer left me with this quote, which he said may be among the most revealing statistics in play for the energy markets.
"There are 700 cars for every 1000 Americans right now. There are 500 cars for every 1000 Europeans. Currently, there are 30 cars for every 1000 Chinese: And that number is expected to go up to 240 by the year 2035. That implies an enormous strain on existing crude oil supplies."
With an eightfold increase in demand—coming down the pipeline from the most populous nation on earth—would you want to be short crude in the long haul?
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