Peak oil has become one of those multi-faceted terms that is re-interpreted by everyone who utters it. Depending on who you follow, peak oil is either dead, delayed or even closer than ever thought possible. In this article, we’ll look at what’s happened to this once-clear concept of finite oil reserves, and where it stands now. (For more, see Peak Oil: Problems And Possibilities.)

A Peak Oil Primer

Simply put, peak oil is the recognition that there will be a day in the future when oil production enters an irreversible decline. This situation can evolve through a few different scenarios, including:

  1. A production decline, when new deposits prove too difficult to tap and existing reserves start to draw down. (Also see, The Cost of Shale Oil Versus Conventional Oil.)

  2. A production decline when oil alternatives become more cost effective, pricing oil out of the market, and making exploration and production unprofitable.

  3. A production decline when all the oil deposits on earth have been exploited, and there is simply no more to be had no matter the price or difficulty.

Scenario A is the one we’ve been worried about the most, because it is generally believed that there aren’t many vast, cheap-to-extract deposits of oil left. The reason we worry about it less now is that technology for extraction is rapidly evolving. This market has seen investments pay off dramatically. The U.S. is increasing production with the use of fracking, and this technology has still not been widely used in other, similar deposits across the globe. So the peak oil scenario borne out of technical difficulty has been pushed farther into the future. Because money encourages rapid innovation, this trend will likely continue.

Which brings us to the cheaper alternative peak oil scenario. People who are not actively engaged or heavily invested in oil don’t generally see this as a bad thing. If a solution comes to market that is cheaper or somehow more cost-effective than oil is, then the market will enforce peak oil whether there are still deposits or not. Bear in mind that oil is about a lot more than just gasoline. Many types of lubricants and chemical compounds will keep crude pumping even if our cars, trains, planes, homes and ships all find other sources. So this scenario, although a positive development, is more than a few decades away unless a truly transformative technology like teleportation unexpectedly hits the market. (For related reading, see How Low Oil Prices Affect Alternative Fuels.)

The last scenario where all the oil resources are truly depleted is the most apocalyptic. We are looking at a world in which all the oil has been tapped because the market made even the most impossible deposits attractive, suggesting that affordable alternatives never panned out. Being somewhat of a cheerleader for innovation driven by the market, I think this is the most unlikely of the three. Also, given the increases in recoverable reserves that fracking -- one innovation -- have brought, the timeline for this scenario is now much longer. With all that time, it is hard to believe no viable alternative to oil as an energy and source of compounds will be discovered. (For more, see 3 Industry-Impacting Innovations On The Horizon.)

Missing the Good Old Days

Right now, no doubt numerous oil exploration and production companies pine for the good old days when peak oil seemed to be an imminent threat. We are living in a period of oversupply and potentially on the cusp of decreasing demand. This may be one of the reasons that Saudi Arabia, an oil superpower, is looking to reorganize its economy.

The Bottom Line

Peak oil is still somewhere in the future, but hopefully it comes about because we have innovated our way away from burning prehistoric jungles as a primary energy source. In the near term, investors should worry more about the demand side of the oil equation than the supply side.