Peak Oil

Peak Oil has entered the energy lexicon as well as the energy debate.  There are some that feel that global energy production has peaked already, and that we are entering the post oil phase in the grand scheme of energy supply and demand.  The implications of truly achieving peak oil from a production perspective are extraordinary, with impacts and implications that we have not yet begun to fathom , much less experience.  

The other important consideration involving our energy future is the balance, or imbalance, between supply and demand.  The demand for oil is continuing apace around the world, especially as citizens in the emerging economies of China and India yearn to improve their living standards.  The expanding imbalance between supply and demand will impact the economics of oil and energy for years to come in a profound way, with an extraordinary shifting of wealth around the world as never before seen or experienced.  

The earth a big place - is peak oil a reality?  Isn't this simply a matter of supply and demand?  Won't increasing demand drive prices higher, which will cause us to find more of that oil, thus satisfying the increasing demand and moderating prices?  Won't the invisible hand of Adam Smith solve everything?  There is one small consideration that political economists have had difficulty addressing - the stability of republics in times of scarcity.  Will we survive the transition that the apparent scarcity of oil will cause?  Lest I get too far ahead, let's take a look at the fundamentals.

The concept of peak oil was initially proffered by M. King Hubbert in the 1950's, in an article he wrote for a presentation to the American Petroleum Institute in June, 1956.   At the time, Hubbert was the Chief Consultant for General Geology at the Shell Development Company.  Hubbert's research was focused on understanding production levels  over time of exhaustible resources, namely fossil fuels.  Hubbert developed a mathematical equation that correlated with observed fossil fuel production data.   The key inputs to his analysis include an estimate of proven reserves and several actual production data points.

Based on his analysis, Hubbert calculated that oil production in the lower forty-eight (the contiguous United States) would peak in either the late sixties or the early seventies.  And you know what?  Oil production in the lower forty-eight actually did peak in 1971, as shown in the chart below.

The graph above shows oil production peaking in 1970.  Since that time, domestic oil production has dropped by close to 50%, even with the advent of two intervening periods of oil price spikes, and multiple administrations and initiatives to secure America's future and eliminate our dependance on foreign sources of oil.  We now depend on foreign sources for approximately two-thirds of our oil, and the amount continues to climb.  

World oil production, above, has been flat for a few years, hitting its peak in 2005 and declining in each of the last two years.  Hubbert predicted global oil production would peak in 2000.  Oil is entering a new phase, and we are facing a global challenge unprecedented in its scale.  What's next?