What is “Peak Oil”?

Peak oil theory states that the world’s oil supply, while still plentiful, is approximately 1/2 exhausted. Among other things, this means that the world’s rate of oil extraction will begin soon or has already begun to decline. This decline, coupled with a world demand for oil that continues to grow, will create a gap between demand and supply. This in turn will produce sharply rising prices for oil and all things that require oil. It will also cause unexpected and inconvenient shortages.

intro.1Most of us don’t realize how dependent we humans have become on cheap oil for all the products we consider essential or how much energy there is in a barrel of oil. Peak oil and the resulting high prices for oil will disrupt the world economy and our lives in ways we’re only beginning to understand. For example, it’s often said that food travels an average of 1500 miles to make it to an average American dinner plate. Peak oil will force us to eat food that’s grown closer to where we live. The core business plans of Wal-Mart, Home Depot, McDonalds, and many other chain businesses are dependent on cheap oil. So is medicine and public health as we practice it now, agriculture, the sports and entertainment industries, and most of the world’s manufacturing businesses. So are our suburbs. Peak oil will change everything.

Hubbert’s Peak

intro.1The central theme of Peak Oil theory has been around for 40 years, developed by an oil company geologist named M. King Hubbert. Hubbert studied the production patterns of oil wells and concluded that they follow a predictable pattern of extraction. During the early years of a given well, production increased each year, because the producer brought in more equipment and learned where and how to maximize the extraction rate. Then over time, the extraction rate would plateau and begin to decline as the oil in the well became exhausted.

There would still be a great deal of oil in the well at its peak of production. In fact, Hubbert found that peak extraction for a well corresponded to point at which the well still had 1/2 the original quantity of oil remaining. But the production rate would decline. And the production rate would continue to decline despite the introduction of new equipment and new techniques. The decline of extraction rate was a function not of technology, or economics, or politics, but of geology.

Had Hubbert stopped there, his theory would be an interesting and respected approach to oil well extraction in geology courses, and we would never have heard of it. He didn’t. Hubbert applied his “peaking” theory to entire fields, to nations, and in fact to the world’s oil supply. In each case, he theorized, oil extraction volume follows a predictable pattern: it increases over its early life, reaches a peak at which approximately 1/2 the oil remains in the ground, then begins to decline. And once the extraction rate begins to decline, no amount of new equipment or new techniques will reverse the decline. It a function not of technology, or economics, or politics, but of geology.

Hubbert theorized that the U.S. oil extraction rate would peak in the early 70s. He was right. He theorized that the world extraction rate would peak between 1995 and 2000. He guessed a little early. With the benefit of hindsight, we now know two major phenomena that Hubbert could not and did not include in his planning: (1) he failed to anticipate the discovery of the North Sea oil fields between Great Britain and Norway, and (2) he failed to anticipate the Arab oil boycott of the early 70s and the resulting conservation measures the oil-consuming world took in response to it.

Supply and Demand

Everyone agrees that the world oil extraction rate will peak and begin to decline. The disagreement is about when it will happen and what effect the peaking will have on the world economy. And we can never understand the challenge of peak oil without grasping it as both a supply problem and a demand problem.

Supply problem: the world’s generous endowment of cheap, accessible, relatively sweet (low in sulfur and other impurities) oil in large deposits is declining rapidly, leaving only the deeper, dirtier and less accessible oil in smaller deposits. The oil will still be there, will still be there in abundance. It just won’t be cheap any more.

intro.3Demand problem
: The U.S. has 5% of the world’s population but consumes 25% of the world’s oil. The massive populations of China and India are beginning to enjoy the fruits of their productive economies and want the same advantages they see Americans enjoying. They want automobiles, and air conditioning, and big screen high-definition TVs. As these massive numbers of people begin using oil at a rate closer to that of Americans, the world demand for oil will continue to rise. China’s demand for oil is expected to grow by 5-7% per year, and India’s by 4-7% per year. Conservation by north American consumers will help, but it won’t keep world demand from rising.

For most of us in the industrialized world, our demand for petroleum is relatively inelastic. Bump that inelastic demand up against a decreasing and inelastic supply, and the result isn’t pretty.

A personal note. We are citizens of the U.S., born in 1952 and 1953, respectively. When we were born the world consumed oil at about 20 million barrels per day. Now the world consumes about 85 million barrels per day. So we’re the problem. We and those in our generation have increased the world’s oil consumption by more than 400% in about half a century.