What is Peak Oil?

Peak oil is the point in time when the maximum rate of crude oil extraction is reached, after which the rate of extraction is expected to begin to decline… forever.

It simply does not matter why peak crude oil extraction is reached, the peak is the peak regardless of the cause. The cause could be geological or it could be economics but most likely it will be a combination of the two.

 Matthew Yglesias Recently wrote in Slate: “I will admit that I’ve always found the “Peak Oil” debate to be a little bit confusing, especially because both the words “peak” and “oil” turn out to have some ambiguity to them.” 

While it is true that the word “oil” has some ambiguity to it, there is no ambiguity about the word “peak”. Let me explain:

Some include such things as ethanol, biodiesel, palm oil, bottled gas such as propane and butane and even refinery process gain as oil, I only track, and regard as oil, crude oil plus condensate. Condensate, mostly pentane, is a product of natural gas wells but the EIA includes it, along with crude, in their data base so we have no choice but to include it in ours.

However there is nothing ambiguous about “Peak”. Some people say peak demand is different from peak supply. No, it is not. It is not because both supply and demand are a function of price. The higher the price the more oil producers are willing to deliver and the less consumers are willing to buy. So both peak demand and peak supply depend  on the price. And of course the state of the economy comes into the picture. Both peak supply and demand in a booming economy would be totally different from peak supply and demand in a deep recession.

So when peak oil happens, or happened, it will be both a function of supply and demand. There will always be oil left in the ground. In other words we will never run completely out of oil. But as the marginal price of rises the peak gets closer and closer. In fact it may have already arrived.

The following graphs and text are from PeakOil.com.

Discovery and Production

Peak oil theory states: that any finite resource, (including oil), will have a beginning, middle, and an end of production, and at some point it will reach a level of maximum output as seen in the graph to the left.

Oil production typically follows a bell shaped curve when charted on a graph, with the peak of production occurring when approximately half of the oil has been extracted. With some exceptions, this holds true for a single well, a whole field, an entire region, and presumably the world. The underlying reasons are many and beyond the scope of this primer, suffice to say that oil becomes more difficult and expensive to extract as a field ages past the mid-point of its life.

In the US for example, oil production grew steadily until 1970 and declined thereafter, regardless of market price or improved technologies.

Which USGS Estimate

In 1956 M. King Hubbert, a geologist for Shell Oil, predicted the peaking of US Oil production would occur in the late 1960s.

Although derided by most in the industry he was correct. He was the first to assert that oil discovery, and therefore production, would follow a bell shaped curve over its life. After his success in forecasting the US peak, this analysis became known as the Hubbert’s Peak.

  • The amount of oil discovered in the US has dropped since the late 1930s.
  • 40 years later, US oil production had peaked, and has fallen ever since.

World discovery of oil peaked in the 1960s, and has declined since then. If the 40 year cycle seen in the US holds true for world oil production, that puts global peak oil production, right about now; after which oil becomes less available, and more expensive.Oil and Gas Production

Today we consume around 4 times as much oil as we discover.

If we apply Hubbert’s Peak to world oil production we estimate that approximately half of all oil that will be recovered, has been recovered, and oil production may reach a peak in the near future, or perhaps already has.

“Understanding depletion is simple. Think of an Irish pub. The glass starts full and ends empty. There are only so many more drinks to closing time. It’s the same with oil. We have to find the bar before we can drink what is in it.”

Campbell


What peaking does mean, in energy terms, is that once you’ve peaked, further growth in supply, is over. Peaking is generally, also, a relatively quick transition to a relatively serious decline at least on a basin by basin basis. And the issue then, is the world’s biggest serious question.

Simmons

 

31 Responses to What is Peak Oil?

  1. k martinson says:

    Ron,
    Yes, the inserted graphs should be removed. They do not show up at all.
    I got the following error:
    The owner of this website (peakoil.com) does not allow hotlinking to that resource

    • Ken, is it Ken, I have fixed the problem. They will show up now. It was my mistake. I should have snipped the charts and inserted them instead of just copying and pasting. I will know better next time.

  2. “both supply and demand are a function of price”…
    Does this include the “technology price”, i.e. the EROEI?
    Compare: http://www.wachstumsforum.ch/economics/e/perfect-storm.pdf
    “Our economy is in fact the consumption of stored energy, and other non-renewable materials, such as clean water, a normal climate, and an intact system of biodiversity, i.e. the dynamic system of plants, animals, and bacteria of all kinds. The EREOI, i.e. the rate of Energy Returned On Energy Invested, is steadily decreasing. Energy reserves that produce less energy than the energy needed for their extraction are useless for the economy. This represents the so-called ‘energy cliff’ – The Perfect Storm ahead.” ( http://www.ecoglobe.ch/i-dont-worry.htm )

    • “Does this include the “technology price”, i.e. the EROEI?”

      It includes everything. Demand depends on what people need or just want, and what they are willing to pay for it. Supply depends on what producers are willing to deliver at the current price. All three, supply, demand and price move up and down with the state of the economy.

      EROEI affects the state of the economy. Basically when you are talking about EROEI you are talking about surplus energy. That is we are talking about energy that is left over after all basic necessities have been satisfied. And from your link:

      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

  3. Oillover says:

    What is the source of your data for the chart titled “Oil and gas production”?

  4. Nick G says:

    Ron,

    You might want to update this article. Given that US production is approaching the level of it’s earlier peak, sentences like “In the US for example, oil production grew steadily until 1970 and declined thereafter, regardless of market price or improved technologies.” no longer make sense.

  5. dorji yangka says:

    hey Ron,

    peak oil appears to apply to a specific field or region.
    I don’t think it applies to the entire world; the world is producing and consuming more and more.

    ‘cheap oil’ might have already peaked; but did ‘oil’ peak already?

    I shall await your kind response.

    • peak oil appears to apply to a specific field or region.
      I don’t think it applies to the entire world; the world is producing and consuming more and more.

      You are saying fields peak, countries peak and even entire regions of the world peak but the world will not peak. I don’t know whether to laugh or cry. The entire world is made up of oil producing countries and when enough of them peak and go into decline the world will peak. The entire world is peaking right now and will be in serious decline by 2017.

      • Anonymous says:

        Ron,

        I think Dorji is asking about the effect on prices when oil supply begins to be tight.

        Look at how US production has started rising dramatically, since “peak oil lite”began and oil prices rose in an historically unprecedented fashion.

        • Nathanael says:

          Recent US production is driven by shale oil, which is based on wells which run out much, much faster; a shale oil field peaks in the first 5 years and has lost half its production in 10 years. Despite this limitation, shale oil is also inherently more expensive to produce than ‘conventional’ oil. The key thing about this is that *alternatives (like electricity) are cheaper*.

          Theh way this works is simple: when oil prices go way up, people switch to alternatives, because the alternatives are already cheaper. Then, since demand drops, the price drops again, and so oil exploration halts (because there is no *cheap-to-produce* oil left), so supply drops. Repeat until demand and supply both go to zero.

          1920s ‘gusher’ oil was really, really cheap; it was hard for alternative energy sources to compete. Now, at high prices, it’s easy for them to compete. So they’re winning.

          • Bill Chaffee says:

            Electricity is an energy carrier not an energy source, like the drive shaft of a car only much more versatile. It takes more energy to generate electricity than you receive from it. Most generators are powered by heat engines. The ratio of heat energy input to electrical energy output is usually about three to one. However the best combined cycle gas power plants are as much as 60% efficient.

  6. Hello Ron,

    So awesome to discover you. I never heard of you until today – and the way you convey your data I am very impressed. For years I have followed folks like the late Mathew Simmons, currently people like Richard Heinberg, James Kunstler to Jeff Rubin and Dr Colin Campbell.

    All of a sudden once fracking came into play – even people with intelligent brains gave up on peak oil. A few years of a bad economy and a little high tech fracking will never snuff out peak oil. It delayed it a little, but that’s it.

    To make an analogy – oil is like protein. For over a century we enjoyed the cheapest protein, lets call it chicken (conventional oil)… Then one day the cheap conventional chicken started to peak – supply couldn’t meet demand, prices spiked – so some people discovered a more expensive protein – filet mignon (unconventional oil especially fracking). So production of filet mignon grew, as prices stayed high for both filet mignon and chicken.

    For some reason – people think filet mignon will replace chicken – until the prices collapse…

    Now we are back to conventional oil, or chicken… It turns out filet mignon can’t replace chicken. Like it’s a recent discovery, or an epiphany. Maybe people simply rediscovered their intelligence?

    Peak oil never left. It was cloaked by having massive subsidies go into fracking. Millions of suckers put their 401k retirement money into fracking investments… now they say fracking debt is TWO times bigger than the subprime mortgage fiasco.

    Respectfully,

    Luther

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  8. Pops says:

    Hey Ron, thanks for linking the PO.com Primer, I just noticed it. I’ve learned a couple things since I wrote it back in ’04:

    i) The future is a moving target
    ii) Oil production is about profit, not energy
    iii) Hubbert’s theory takes “all things being equal” as a given but they never are…

    The “idea” chart I sketched (the blue and red Discovery/Production chart) was my graphic description of Peak Oil. It simplistically assumed that since we know how much oil has been discovered in the past, we can easily forecast how much we will extract in the future — and from that predict the peak. What I didn’t get at the time is that there are a wide variety of fossil resources and so a range of reserve estimates (discoveries), and all are based on assumptions of technology, price and profitability. As well, there is a large range of possible demand scenarios since Demand itself is not just Desire but also the Ability to pay. Both of which are also widely variable.

    I was looking for the most simplistic explanation of PO, and I still think the discovery/extraction curves might actually look similar to what I scribbled — but now I think they will only be accurate from the vantage of the far right side of the chart, not the middle.

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  13. Jonathan Baruch says:

    Hi,

    As a newbie to Oil, can you just explain to me briefly why there is a massive global supply glut and the price of oil has crashed and why this theory has any credibility at all in the current oil environment, and if so when do you expect this to change? (Apologies for sounding rude, I’m just very interested if you have a response)

    Thanks

    • Faisal Mütze says:

      You’re probably here to hear it from him, but until he replies, maybe I can help. I’m a lawyer with a petroleum engineering undergrad, I worked in the oil industry for about 5 years, and some of my firm’s client are oil and gas companies.

      The supply glut essentially boils down to one reason: in the past, when supply guts were looming on the horizon, Saudi Arabia would voluntarily cut it’s own production. Other OPEC members would follow suit, but the major cuts would be Saudi ones.

      This time, the Saudis figured that just doesn’t make sense anymore. In light of the fact that both the US and Russia produce either as much or more than the Saudis do, the Saudis figured that cuts at this stage would lead to a loss of market share – any cuts they make would be compensated by an increase in US shale or Russian production.

      Other sectors that the Saudis were worried about were 1) increased Iraqi production and (2) the reintroduction of Iranian oil into the market. Once again, the fear was that any cuts that Saudis made would open the door for those two countries to increase production and capture market share.

      Saudi had two options in light of all these challenges – keep trying to play market regulator and risk losing market share, or give up that role entirely and let the production cuts happen “naturally” when companies go bankrupt. A third unlikely option would have been to get the Russians to sit at a negotiating table with them and other OPEC members and agree to production cuts, but that was never seriously on the table.

      As for “Why does this theory have any credibility at all”, the answer to this question is purely 100% geological – because oil is a finite substance.

      We know, without a shred of a doubt, that it will at some point deplete. Since it will absolutely deplete at some point, it means that there will be a day when we reach peak production and we will never, from that point forth, produce as much as we did on “peak oil day”. We might continue producing for another 200 years before oil runs out, but these things will absolutely happen, as sure as the sky is blue.

      Does this mean that the theory is actually relevant? In my opinion, absolutely not. The models which predict doomsday scenarios all massively and embarrassingly underestimated human ingenuity. They embarrassingly underestimated how much you could squeeze out of unconventional oil, and more recently they embarrassingly overestimated how expensive the process needs to be. The upcoming embarrassment is likely going to be “They embarrassingly underestimated how long you could produce from a single shale play”, but my petrophysics professors would strongly disagree with that so take it with a grain of salt.

      You know what’s crazy? Unconventional oil from shale wasn’t even close to being the best candidate we had in stopping peak oil. In terms of total quantity, our best bet was – and is – gas hydrates. We have more than enough energy in our known deposits of gas hydrates to recuperate all the energy we’ve ever burned from oil. Since the beginning of time. Every single plane that ever flew, every single power plant that ever operated, every single car that ever drove, and every single rocket that ever launched – we could do it all again and then some, just from gas hydrates.

      We don’t have the technology yet to effectively unlock it, but when the time comes – certainly not the time now, with $29.40/bbl – we probably will.

      One would hope that by then, alternative energy would have driven oil to extinction, while the planet still has time. If you’re counting on peak oil to do it, you’re in for a tremendously long wait.

  14. Olu says:

    Hello Ron,

    I was wondering when you posted the article as it is not coming up.

    I’ll like to reference it for my dissertation.

    Thank you

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