NEW YORK (TheStreet) -- They don't come any smarter than Rep. Roscoe Bartlett, a former Member of Congress from Maryland.
With a Ph.D. in Physiology, Dr. Bartlett had a number of high tech patents that had made him a very wealthy man. He was also a successful farmer, professor, and real estate developer. As his Legislative Director, I quickly came to admire and respect greatly his character and intelligence.
But I never could understand why a man of science with such faith in the brilliance of the free market like Roscoe Bartlett was a believer in "Peak Oil," the theory that global fossil fuel production was on an inexorable decline.
He was hardly the only proponent. In May 2008, when oil was over $140 a barrel, Goldman Sachs (GS - Get Report) published a report that claimed, "The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty."
Oil is now around $100 a barrel with record levels of production.
Based on pure economic demand, it should be around $60-70 a barrel, admitted Rex Tillerson, the CEO of ExxonMobil (XOM - Get Report), in 2011. At that time, oil was in the same range of about $100 a barrel. Without speculators, obviously the price of oil would be much lower.
But that was not supposed to happen, according to the Peak Oil School. All the easy oil that could be found had been. From that point on the world would just have to live with high oil prices that were supposed to be around 100% more than at present.
In one word, Peak Oil got drilled by "fracking."
Fracking has been around only as long as computers, as it was licensed exclusively to Halliburton (HAL - Get Report) in 1949. And, like computers, advances in technology allowed for fracking to accelerate in usage in the early 2000s. Fracking has advanced to the point where North America is now the largest energy producing region in the world.
The free market was every bit as important as fracking in proving the Peak Oil School to be wrong.
Speculators, swayed by the Goldman report and related materials, drove up the price of oil. As Tillerson stated, it's about 50% more than it should be based on fundamental economic demand. By the beauty of the free market, that results in the economic principle of "substitution." With oil priced so high, alternatives such as natural gas, wind power, solar energy and others were substituted.
Over $70 billion has been spent on alternative fuels by major energy firms since 2002. The projects are broad in both scope and geography. ExxonMobil has expended over $600 million to turn algae into fuel, as but one example. Since 2005, BP has spent over $5 billion. Royal Dutch Shell has invested in projects that range from converting crop waste into fuel in Texas to ethanol ventures in Brazil.
That investment is having an impact on the projected energy mix for the future.
At present, fossil fuels are the most widely used source of energy in the world. The International Energy Agency in its "World Energy Outlook 2013" expects that position to decline in the global energy mix from 82% to 76% by 2035. Renewable energy will account for nearly half the net increase. Natural gas demand will rise by half with little trouble in meeting the need: there are more than 20 permits pending in the United States to export to markets around the world. The reason that natural gas soared in price this winter was not because there was not enough, but because the infrastructure could not handle the increased demand.
That is the opposite of Peak Oil: there was plenty of fuel, just not enough pipeline networks to distribute it efficiently.
But that will change soon as there are three major pipeline projects under way to better transport fuel from the Marcellus Shale in Pennsylvania to customers on the East Coast. Once again, the brilliance of science and the beauty of the free market at work in addressing an opportunity in the energy sector. Exactly as it has proved Peak Oil to be wrong.
Jonathan Yates does not have a position in any of the stocks mentioned in this article.