What is 'Peak Oil'

Peak oil refers to the hypothetical point at which global crude oil production will hit its maximum rate, after which production will start to 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 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 become more cost effective than extracting oil. In this scenario, the market decides whether there are still easily accessible deposits or not when peak oil becomes a reality. 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.

Peak Oil Predictions

There have been many predictions about whether and when the world’s oil production would peak. In 1962, Hubbert predicted that global oil production would peak near the year 2000 at a rate of 12.5 billion barrels per year. He later forecasted that the world would hit peak oil if the current trends in 1974 continued. Both his theories proved incorrect. But there are some analysts and industry officials that believe we would see peak oil between 2015 and 2030.

But making these forecasts isn’t always easy because of the difficulty in measuring the actual size of the world’s oil reserves, especially since unconventional oil may not be expected to meet a shortfall. 

Possible Consequences of Peak Oil 

Some of the most obvious consequences of hitting peak oil are directly related to the economy. A drop in oil supplies will lead to a sharp spike in prices. And because many industries rely on crude oil and related products, other facets of the economy will see drastic changes. Major sectors like agriculture — which are heavily dependent on the oil industry for pesticides, fertilizers and fuel — could see a steep decline. But the ripple effect could continue to transportation and even the food industry, which could see increases in prices. In a worst-case scenario, large areas of the world could experience famine because of higher food prices.

People rely very heavily on crude oil and its many byproducts. That means that any decrease in oil production may result in a change in our culture and technology. Because of the reliance on fuel for transportation, a drop in oil supplies may make it unsustainable for people to live in metropolitan areas unless they increase the use of alternative means of transport. The majority of the impact of peak oil would likely be felt in the lower to middle income families. 

RELATED TERMS
  1. Hubbert's Peak Theory

    Hubbert’s peak theory is the idea that because oil production ...
  2. Initial Production

    The initial production rate measures how many barrels of oil ...
  3. Oil Reserves

    Oil reserves are an estimate of the amount of crude oil located ...
  4. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...
  5. Oil ETF

    An oil ETF is a type of fund that invests in companies involved ...
  6. Day Rate (Oil Drilling)

    Day rate is the amount a drilling contractor gets paid by the ...
Related Articles
  1. Investing

    Peak Oil: Problems And Possibilities

    Learn a little more about the "non" part of this nonrenewable resource.
  2. Financial Advisor

    Is Now the Right Time to Buy Oil Stocks?

    Learn about the oil industry and how crude oil effects the prices of oil stock. Understand if now is a good time to purchase oil stock.
  3. Financial Advisor

    Oil Prices Expected to Surge in 2017

    Oil has made headlines for its plummeting prices this year. When will prices rise again?
  4. Insights

    Who Wins With Low Energy Prices? 

    Low oil prices are here to stay for some time. Which economies will benefit or lose from the low oil price regime?
  5. Investing

    Investing in Oil Stocks vs. Oil Companies: What's the Difference? (USO)

    Learn about the major advantages, disadvantages and risks of investing in oil companies and investing in oil and gas exploration companies.
  6. Investing

    Who is Most Affected by Lower Oil Prices?

    With low oil prices affecting just about everyone, from citizens to corporations to entire nations, we look at who wins and who loses with the price drop.
  7. Investing

    Oil Picks For Bulls And Bears

    Everyone thought the biggest economic news of 2014 was going to fall somewhere between the end of quantitative easing, some rumblings from the European Union or whatever Putin’s next bold move ...
  8. Investing

    These 5 Countries Move the Supply of Oil

    Learn which countries are the largest source of change in the global supply of oil. Oil prices crashed in 2014 as supply increased and demand dropped.
  9. Investing

    How Low Can Oil Prices Go?

    Record low oil prices are a welcome development for consumers, but oil companies are struggling with choosing market share over profitability.
  10. Investing

    U.S. Shale Oil Production: The Rise and Fall

    Low oil prices are taking their toll on U.S. shale oil producers, but their rise over the last decade is evidence of increasing U.S. energy independence.
RELATED FAQS
  1. How does the law of supply and demand affect the oil industry?

    Learn how the law of supply and demand affects the oil industry. Supply and demand determines the price of oil, which drives ... Read Answer >>
  2. How does the price of oil affect Russia's economy?

    Discover how the price of oil affects the Russian economy. As a net exporter of oil, Russia depends on robust oil prices ... Read Answer >>
  3. What is the relationship between oil prices and inflation?

    Understand how the price of oil and inflation are often seen as being connected in a cause and effect relationship. Read Answer >>
  4. What are average operating expenses for the oil and gas sector?

    Learn about the average operating expenses and average operating expenses margin for the oil and gas sector and how they ... Read Answer >>
Trading Center