Explaining Peak Oil

There is a vast amount of misinformation and misunderstanding when it comes to the term 'peak oil' and the topic tends to bring out visceral reactions from both sides of the argument. Try to set aside your preconceived notions and read with an open mind. 

The topic raised here is what is known as Peak Oil. 'Peak oil' is mostly known as the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This can easily be seen on individual oil wells and the concept is easily broadened based on projected reserves and the combined production rate of a field of related oil wells. Peak Oil in a simple sense means that oil resources on the planet are finite and that there will come a point in time when one day less oil will be extracted than on the previous day. And the following day even less. And so on, no matter how much exploration is done, no matter how efficient the new extraction technologies developed. There will come a point when less and less oil is available for the industrialized societies of the planet. Oil production will have 'peaked'. In past decades there has been much debate about when global oil would peak, whether it already had peaked and we were declining already, or whether we were going to imminently hit the peak. Of course, all these people missed the point, and ended up getting much of the story wrong which is why so many have such varying opinions on the subject.

Many people in the peak oil movement from the 1970's through the early 2000's who talked about peak oil equated it to the end of cheap plentiful oil. They said that the peak would mean that there would be less and less oil available at a time when there was more and more demand. This would, they said, make prices skyrocket. Less availability meant price shocks that would only go upwards forever. Of course, reality has proven to be more complex. 

Today, by contrast, we have been swimming in cheap oil for years (2014-2017, so far). So much so that there was, for a little while there, a worldwide 'glut.' In reality, global production of conventional oil peaked in 2005. Only unconventional oil, combined with conventional, has pushed the oil peak further afield. To be more specific, a combination of massive debt and new technologies have given us this breathing room. The unconventional oil that we have gone so in debt to acquire notoriously provides a small fraction of the net energy we've come to expect from conventional oil sources [link]. But while it will be enough to confuse those less educated about peak oil, it will not be enough to escape the dire consequences. 

​On the production side looking forward, a 2017 HSBC report concluded that total oil production has now peaked in over 81% of all oil-producing countries on the planet. The report's most shocking finding is that just to keep production flat against increasing decline rates, the world will need to add four Saudi Arabia’s worth of production by 2040. North American unconventional production, despite remaining the most promising in terms of potential, will simply not even be close to being able to fill this gap. 

On the debt side of the equation looking forward, a 2016 Deloitte report showed that over 35 percent of independent oil companies worldwide declared bankruptcy that year, with another 30 percent projected to follow in 2017 - leaving only about 1/3rd standing by 2018. 

A recent SRSrocco Report showed the story for the big names in oil with a few graphs:

And the Hills Group put out this very interesting chart:

The reason the above chart is so interesting is that it means that virtually every oil producing country in the world requires a much higher oil price to balance its budget – some of them vastly so (i.e. Venezuela) because their oil does not have the net energy it once did and so does not buy the economic growth it once did. Their economies have been designed around oil, which for many of them is their largest source of income. We see Venezuela engulfed in economic meltdown even though they sit atop such vast amounts of oil and ask ourselves why. The answer is that the oil there is of such low quality that it cannot generate any economic activity - the debt required to extract it outweighs the economic growth it would generate. In other words, it does not provide enough net energy. It appears that not a single oil-producing country is balancing its budget. Their debts are growing bigger every day.

​Peak oil is not about running out of oil. It never has been. It is about production that is limited by technology, economic viability, and EROEI (energy return on energy invested). There are two things we have to understand: availability and net energy. Oil has become, and will forever continue to be, more energy intensive to extract and refine as well as more expensive to do so. And what is left will forever continue to give less and less net energy because of this. If you don't understand this, then you don't understand peak oil whatsoever. If you do understand this, then you understand why we must start thinking about what the future will look like. We are seeing a new world take shape, and quickly. Old denials about peak oil must be abandoned so a new vision of the future more in line with reality can take its place.