Peak Oil: What Is It?

Peak Oil is a term that has become common currency in energy debates in last three years, due in large part to the spectacular rise in the price of crude between 2005 and the end of 2008. But what does Peak Oil actually mean and, more importantly, what do I mean when I use it in my articles?

In the purest and original sense of the term, Peak Oil refers to the point in time at which the rate of oil production (as measured, for instance, in barrels per day) peaks. This peak, according to the original theory, is then followed by a rapid and irreversible decline as attempts to extract more oil out of the ground run into the absolute geological limits of the resource. Wikipedia, as always, does a great job of explaining the theory of Peak Oil and provides a wealth of resources for those who would like to expand their knowledge further.

I do, on occasion, refer to Peak Oil in my articles, including one I wrote last week where I claimed that Peak Oil would be a powerful driver of gasoline prices in the next few years. Given how contentious this theory is, I wanted to clarify where I stood on it and how readers should interpret what I mean when they see those two words side-by-side in my posts.

Are we about to run into the absolute geological limits of oil in a way that won't allow us to increase production going forward? I don't know and I have nowhere near the appropriate level of knowledge to truly judge the data I see on this weekly. And frankly I don't particularly care; humanity will hit that peak at one point or another and the exact timing is of very little relevance to me.

What is far more relevant is the price point (and time) at which we hit the economic - rather than the geological - peak: let's call that Effective Peak Oil (EPO). EPO occurs where the marginal barrel of oil, which sets the price for all barrels of oil in the market, is so expensive that: (1) it triggers a process whereby governments, people and firms search for and find substitutes in a way that alters the structure of the economy and demand for oil forever and; (2) in the process, it also triggers a substantial economic shock. Does EPO look like a nice, smooth bell-shaped curve? Probably not, or at least not when plotted on a time scale relevant to most human beings (i.e. 60 to 90 years).

In the following interview he gave on CNBC last week (thanks to the Infectious Greed blog), Jeff Rubin, former Chief Economist at CIBC World Markets and author of the new book Why Your World Is About To Get A Whole Lot Smaller, sums up my thinking on this issue better than I ever could. His most memorable quote: "What we are running out of is oil we can afford to burn."

DISCLOSURE: None

Comments

[prairiedog555:]

I think most of those peak oil guys are long oil stocks.
In fact most wall street analysts are suspect. The answer to the oil shortage is Nat Gas, but our phony congress and president (and Bush before him) will not touch it.
Kind of makes one wonder about who has our best interests at heart.

Sep 30 07:07 AM

[john s. gordon:]

the long term answer to a shortage of domestic u.s. petroleum is coal conversion to syncrude, and i mean catalytic 2-stage hydroliquefaction, not gasification + Fischer-Tropsch which is thermodynamically inefficient and produces excess CO2.
> jack

Sep 30 08:30 AM

[a. palmer jr.:]

I don't know about "Peak Oil" but it looks like right now there is plenty of oil out there today. They keep going back to the old wells with new drilling equipment and finding oil they thought was impractical to extract. I recently read that they're going to Illinois to re-drill some of their old wells! Our problem with oil is India and China. I wouldn't be surprised if they would get industrious enough, they probably would find enough oil in their own countries to power their cars for many years into the future. You don't read too much about oil drilling in India and China but you can bet they have plenty of oil for their own use if they would explore it.

Sep 30 09:46 AM

[Ferdinand E...:]

People who don't believe in peak oil should study the peaking of oil in the United States. Absolutely everything you need to know about this subject can be found in that episode. The thing to study now is natural gas, because some tremendous lies are being told about that subject.

Sep 30 09:56 AM

[Alan von Al...:]

FT Energy blog is linking to to this article, which is unfortunate, since the author knows very little about the subject. I agree with Ferdinand, although I would go much farther and point to rapid decline in Mexico, Norway, North Sea, Kuwait, Venezuela, Russia. Secondary recovery and horizontal drilling accelerates decline at higher capex cost.

Sep 30 01:31 PM

[Shale Gas:]

Read it and weep, peak oilers:

"Brazil’s so-called pre-salt oil region may hold between 25 billion and 100 billion barrels of oil, the country’s cabinet chief said. "

www.bloomberg.com/apps...#

Sep 30 02:06 PM

[koolsool:]

Brazil's oil is in deep water. How much does it cost to bring a barrel of deep water oil to market?????

Sep 30 03:32 PM

[Petroleum E...:]

Brazil sub-salt discoveries will require technology that does not even exist right now, and will take 10 years (+/-) to come on production. By then, existing fields will have declined significantly. Depletion (decline) is a bit like gravity - it never rests.

Sep 30 04:43 PM

[Wisdom vs. ...:]

'peak oil' is a marketing phrase to encourage the naive to embrace government regulation in the energy industry; no matter how you look at it, oil demand will exceed supply and the price of oil will go up more than inflation-- some day; the most important fact to remember is that peak oil theoies have been continuously created for the last 125 years, and so far every one has proven wrong. the price will go up, demand will shift to other energy sources, so what-- what commodity does that not NOT apply to, at some point? those of you think gov't can improve this transition need to learn both history and economics

quit listening to academics, politicians and billionaires, and take it from the people who actually take the stuff out of the ground, we do not need the government to help us keep transportation moving

Sep 30 05:24 PM

[Wisdom vs. ...:]

considering Wiki is run by the people who want federal control of energy, you might want ot expand your sources; that is exactly like getting your info on the Repubs platform from the DNC

Sep 30 05:28 PM

[Vuke:]

A hundred billion bbls is about 3 years world consumption at present rates and, given deep ocean difficulties, it wouldn't be wise to count on this stuff coming out cheaply or quickly.


On Sep 30 02:06 PM Shale Gas wrote:

> Read it and weep, peak oilers:
>
> "Brazil’s so-called pre-salt oil region may hold between 25 billion
> and 100 billion barrels of oil, the country’s cabinet chief said.
> "
>
> www.bloomberg.com/apps...;sid=alV_xoYg185c#

Sep 30 06:17 PM

[Old Trader:]

a. palmer jr.

You may be correct, but why would China be running all over the globe, trying to either buy producing assets, or sign development/production sharing agreements?

I do recall reading recently that may well be large off-shore fields off of the Indian subcontinent, which is why India is pushing REALLY hard to expand their navy.


On Sep 30 09:46 AM a. palmer jr. wrote:

> I don't know about "Peak Oil" but it looks like right now there is
> plenty of oil out there today. They keep going back to the old wells
> with new drilling equipment and finding oil they thought was impractical
> to extract. I recently read that they're going to Illinois to re-drill
> some of their old wells! Our problem with oil is India and China.
> I wouldn't be surprised if they would get industrious enough, they
> probably would find enough oil in their own countries to power their
> cars for many years into the future. You don't read too much about
> oil drilling in India and China but you can bet they have plenty
> of oil for their own use if they would explore it.

Oct 01 12:02 AM

[geologist:]

john -- interesting comment from you regarding clean coal (not the Fischer type -- i agree with you that Fischer clean coal is not the way, period). But regarding Peak Oil ... we are there ..... we have a huge inventory right now, but bbls of oil per day --- we have pretty much hit it. Now Nat Gas --- the shale gas is really the way to bridge our way to alternative fuels/power in the future. There is way way way more NG then has been assumed by the Peak Oil folks. Regards


On Sep 30 08:30 AM john s. gordon wrote:

> the long term answer to a shortage of domestic u.s. petroleum is
> coal conversion to syncrude, and i mean catalytic 2-stage hydroliquefaction,
> not gasification + Fischer-Tropsch which is thermodynamically inefficient
> and produces excess CO2.

Oct 01 12:46 AM

[geologist:]

Brazils find is not near enough to keep up with demand world wide and it is OIP ... not EUR etc ..... we have peaked .... if you know world oil, you will understand .... mercy, the world uses 31 billion bbls/year ..... Now NG, we have more then thought, but it will only act as a bridge until we get new alternatives -- providing we convert over to it -- use it to run our U.S. transportation system and we save approx 11mbopd just in U.S. .. regards


On Sep 30 02:06 PM Shale Gas wrote:

> Read it and weep, peak oilers:
>
> "Brazil’s so-called pre-salt oil region may hold between 25 billion
> and 100 billion barrels of oil, the country’s cabinet chief said.
> "
>
> www.bloomberg.com/apps...;sid=alV_xoYg185c#

Oct 01 12:55 AM

[Alan von Al...:]

Joke of the day: Saudi Aramco wants to help Brazil develop its unproducible pre-salt (the incompetent leading the blind) -- and why are Saudi fatcats diversifying overseas in competition with the Chinese and Russians? I've had two RFPs from Kuwait this week, begging for help. Twilight in the Desert is closer than we think.

Oct 01 04:56 AM

[meridian575:]

Good article. Peak Oil is definately looming on the near term. Natural gas reserves, from what I have read, are plentiful in the mainland and should last the American population for at least 80 years. Some speculate 100 yrs and beyond. As such, the Obama administration is beefing up its energy stimulus plans with the DOE Green Cities Program, with the goal to advance the number of alternative vehicles on the road. And that includes all technologies, electric, hybrid, biodiesel, ethanol, but also propane and natural gas. That program has earmarked almost $300 million for the clean cities initiative. Yahoo Finance has the lead on that story and how it will effect the entire industry and the industry stocks. :
finance.yahoo.com/news...

Oct 01 11:42 AM

[futuresmkt:]

The description of "Peak Oil" that is used is overly simplistic. First, I suggest that we describe it as point/period in time when it is determined that we have discovered half of all recoverable oil. This is immediately problemmatic because we don't know any future with certainty. Assume we agree on the 1/2 number. Second, rate of extraction is variable (as producers/consumers/tr... witness daily). It is impacted by price, substitution, policy, weather, politics and other imponderables.
During the last 5 years we have seen prices fluctuate from $20 - $147- $35/barrel!!! How do we describe that kind of fluctuation if both production and demand are not elastic... at least in the short term?
Generally speaking, I am a strong proponent of the theory however, I believe that volatility, over the next few years will continue to confuse the issue of total recoverable reserves, even as prices trend higher.

Oct 02 01:37 PM