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. 

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