Peak Oil Report

Peak Oil Report

Peak Oil: An Overview
The Theory of Declining World Oil Supplies

The subject of Peak Oil has gained a lot of popularity in recent years. Just a simple LexisNexis search on the topic yields almost 1,000 responses from just the last two years. However, it is an important topic that has yet to really hit the mainstream.

Peak Oil does not mean what many people think it does. The world is not quickly running out of oil. No one is suggesting that the entire world’s drills and rigs will soon be dry and an international panic will break out. The theory of Peak Oil merely suggests that someday, in the far-off future, we will be out of oil. We have reached the peak of our capabilities to produce oil. There are still billions and even trillions of barrels to be produced, but the speed and ease with which we produce these barrels may become a thing of the past.

So what does this mean for you? Well, for the immediate future, not much, to be honest. But soon, the reality of Peak Oil will start to take shape and the prices for oil and other energy products will begin to go up. Way up.

Just think about it. The tangible supply of the world’s oil will remain the same, but it will just be harder to find. This is where the notion becomes a little tricky. How can we have the same supply if production has reached its peak?

Oil companies have very expensive infrastructure and equipment set up in oil-rich parts of the world that today are producing huge amounts of oil. When these current oil hot spots become tapped out, the companies will have to broaden their oil exploration techniques to find more oil. The oil is there to be found, but the expenses of locating it and establishing new drilling sites will be great. As many of us know, the world’s biggest oil companies are hardly in the charity business. Oil profits will remain high, and all that new cost will most likely be passed onto the consumer.

The Father of Peak Oil

Peak Oil was originally the theory of Marion King Hubbert. Hubbert was a 20th-century geologist who made many contributions to the oil industry. He worked for the Shell Oil Co. after completing his Ph.D. During his time with Shell, Hubbert came up with Peak Oil theory. He presented his research to the American Petroleum Institute during a meeting in 1956. Quite simply, he theorized that the world supply of oil would follow a traditional bell curve. At the top of the curve, the supply would reach its peak. After that, oil supply would reach a terminal decline in which the supply would dwindle until it was gone.

Hubbert believed that if then-current trends continued, the world would reach the peak in 1995. Hubbert claimed that many factors would play a role. One of the main factors in the decline of the world’s oil supply is population. As the world population grows, the amount of people demanding oil grows along with it. Simple enough. The only problem is the population has been growing at a much greater rate than that of the discovery and drilling of new oil supplies.

Demand Pushes Peak Oil to the Brink

Meshing with the population theory is the rise in demand for oil. If the population just rises, demand will not necessarily outrun supply. The problem really lies in who is actually demanding the oil. Until recently, population-rich portions of the globe had a comparatively very small demand for oil. Places like India and China had steadily rising populations, yet their demand for oil and energy remained relatively low.

Over the last 10 years, that has become no longer true. Industrialization has finally caught up to these parts of the world, and we’re seeing demand that previously never existed. Now billions of people are driving cars and powering houses and factories in a way they previously weren’t. This puts serious pressure on the demand side of the oil curve.

Obviously, this demand must be met by a complementary amount of oil. The supply now becomes stretched and the price has nowhere to go but up. This is true for many of the world’s resources. New groups of consumers represent a need for scarce resources and there is only a limited amount to go around. Everything from metals and building materials to wheat and other grains must be allocated to new and growing population segments.

While these new needs are usually just a necessary side effect of much-wanted world development, the demand pressure being put on oil has a unique effect. The price and supply of the world’s oil have a much greater effect on the overall world economy than those of any other commodity.

We need oil for our own personal uses, and the more expensive it is, the more we have to pay. We all know this. But what about everything else we need to buy? Oil becomes the de facto cost of transportation and shipping. Anything imported to the United States takes oil to actually get here. From airplanes to trucks to cargo ships, the price of oil factors into everything we buy. The higher the cost of oil, the higher the cost of fresh produce that must be shipped across the country. Just one example of how oil affects everything we need and want.

The Economics of Peak Oil

While the solution for Peak Oil is quite complicated, the problem is a simple economic equation. Currently, the need for oil is rising faster than we can produce supply. This was not true before. Now that there are more mouths to feed and the drilling and refining process has become more difficult, the speed at which we can produce oil will fall. This means that we need to look for more ways to produce oil or different forms of energy to help ease the rapidly growing demand.

The demand for oil is also much different than that for many other resources. When prices become too high, people are usually able to find cheaper alternatives or simply abstain from consuming the product. This is not the case with oil. The demand curve for oil is vertical compared with that of many other products. This means that despite the high costs, we simply have nowhere else to turn.

Imagine if the price of gasoline doubles within the next year. Now instead of paying $3 for a gallon of gas, you’re paying $6. What do you do? You still have to get to work. You still need to get your kids to school. You simply have to live your life the way you’re used to.

This means that despite high costs, most people will not be able to decrease the amount of oil they need or consume. People will make sacrifices in other areas — areas that have a huge impact on our economy. Perhaps to make up for the high costs of oil, Americans will take fewer vacations. The travel industry would take a huge hit. The rising price for oil would drive up the cost of plane tickets, and with Americans scrounging to make up the extra money, the entire industry could take a huge hit.

This is what Hubbert meant when he said that Peak Oil would have a negative effect on the entire economy. Essentially, the more expensive oil becomes, the less money we all have to spend. To combat this, wages will be forced to rise, and before you know it, the prices of everything will go up. That’s inflation.

There are many negatives when discussing Peak Oil. But some groups are finding this to be a positive occurrence. The theory of global warming or climate change has become more and more accepted in recent years. Many environmental groups and politicians are eagerly urging a switch from petroleum to cleaner and more eco-friendly renewable energies. Without even thinking about the economic or geopolitical aspects of the oil business, many believe that increased use of oil will have serious detrimental effects on our environment.

The problem right now is that despite how expensive oil has become, the alternatives still cost more. This means that if Peak Oil continues to drive the cost of petroleum higher and higher, perhaps the costs will act as a catalyst, driving a universal shift to alternative energies. Unfortunately, this thinking could also promote a vicious cycle.

If the world switches to alternative energies, the price of oil will ease and begin to fall. Will we then see a switch back? Time will tell. For right now, the world still runs on oil, and unless we can find a way to speed the supply process sufficiently enough to match the growing demand, a severe shortage is in store for us in the years to come.

Peak Oil is a real problem that the world must soon address. If nothing is done, some very dire consequences could befall future generations. In the short term, however, there are certain ways to profit from what is now widely believed to be the reality of the oil industry. Prices everywhere are rising and crashing through historical levels.

Jamie Ellis, Whiskey and Gunpowder

Peak Oil Resources:

Peak Oil – Life After the Crash

Peak Oil News –

The Association of Peak Oil and Gas –

The Daily Reckoning