Peak Oil

The rapid increase in the oil price to US $150 a barrel and its decline to around $115 has caused me to ponder the peak oil theory.

Peak oil describes the point in time when oil production declines. Peak oil theory assumes demand will outstrip supply as future deposits become increasingly costly to extract, ensuring price escalation and an end to oil dependant economies with catastrophic results. Nobody can tell reliably when that will happen but a groundswell of current opinion suggests it is either already upon us or it is immanent. It is an undeniable fact that reduced oil use, particularly in agriculture and most types of transport require huge societal shifts to sustainable limited alternatives. Alternative technology is far from encouraging. Man made fuels such as ethanol, derived from plants or diesel from coal only partially cover the gap and are much more expensive. There is no viable alternative other than to drastically curtail our use of oil, with less dependence on transport requiring communities to become more self sufficient.

But is the peak oil theory creditable? Are we at the end of what was a brief period of time known as the oil age?

In the past we have encountered similar sharp price increases in the 1970’s when OPEC curtailed production, in 1981 when Iraq was at war with Iran, and in 1991 during the gulf war. This time proponents of the peak oil theory say it’s a different scenario because our reserves have been in decline and new fields will be increasingly costly.

We cannot change geology.

Oil and gas will become increasingly expensive to extract from dwindling reserves. It seems creditable enough to believe we have reached this point in the cycle where oil prices can only escalate rapidly.

Although the statistics available are notoriously unreliable there is however a consistent trend in aggregated world reserves to show a small net increase, cementing a continuing trend of the oil industry each year to find more oil then it produces. In other words the net effect of new discoveries of economically feasible oil fields and assessment of the life of existing reserves of what’s left in the ground showed an incremental increase over previous years, in line with a positive continuing trend. The proponents of the peak oil theory argue some countries like Saudi Arabia deliberately lie about their level of reserves, overstating the figures to justify pumping more oil. But their motivation for doing this is at odds with their investment plans, as they implement large scale infrastructure spending. Why spend vast sums of money to increase your capacity if your reserves are running out!!

Herein then lies the confusion, assuming there is a fudging of figures than the theory remains creditable, if not we have limited time to adjust. And if the latter be correct than the price of oil will actually fall back to somewhere at around $100 per barrel, or even below within a year, assuming countries don’t simply turn off the pump and also barring another War or a cataclysmic event.

What of the future? No one knows!

Maybe there is a window of opportunity over the next 30 years to finally make some headway in reducing our reliance on oil, time for consumers to adjust. Already the recent spike has given a boost towards a more sustainable pollutant free lifestyle.