Peak Oil

What is 'Peak Oil'

Peak oil refers to a hypothetical date when the world's crude oil production rates will enter an irreversible decline. This concept is derived from geophysicist Marion King Hubbert's "peak theory", which states that oil production follows a bell-shaped curve. In the traditional vision of peak oil, the production decline accelerates as the challenge of extracting new reserves grows. This would put pressure on existing reserves that are drawing down overtime. If new reserves are not brought on line more rapidly than the existing reserves drawn down, then peak oil has been reached. Peak oil has been declared several times, but it has been proven premature by new extraction technologies like hydraulic fracturing and better surveying revealing previously undiscovered reserves.  

BREAKING DOWN 'Peak Oil'

Because oil is a non-replenishing resource, there is a limit to how much the world can extract and refine. However, the scenario of total depletion is just one version of peak oil. In theory, peak oil can be brought on by the production squeeze - the drawdown as adding new reserves gets more challenging - but it can also be caused by a production decline when oil alternatives become more cost effective, pricing oil out of the market, and making exploration and production unprofitable.

Peak Oil Supply

The Organization of Petroleum Exporting Countries (OPEC) brought peak oil to the forefront in 1973 when it orchestrated an oil embargo that exposed the United States’ vulnerability to a drop in oil supplies. Since then, peak oil on the supply side, either from total drawdown or difficulty of extraction, has been the primary fear of energy dependent nations. But this same fear spurred investment in exploration and technology, which has continually pushed peak oil’s projected date further and further into the future. Every time prices increase based on the assumption that we are reaching peak oil, the incentive is there for new investments in technology that keep it from actually happening. Of course, there is an endgame to this scenario, but it may not come to that because of peak oil demand.

Peak Oil Demand

Peak oil demand is the point at which new, more efficient technology and alternative energy becomes more cost effective than extracting oil. In this scenario, the market decides whether there are still easily accessible deposits or not when peak oil comes. In 2016, OPEC, one-time bogeyman of peak oil supply, started to discuss peak oil demand as a possibility within a decade. More modest projections have peak oil demand occurring in a range from 2035-50. So peak oil is once again appearing to be inevitable - just not for the reasons we were expecting 30 years ago.