What is “Peak Oil”?

I have referred to Peak Oil several times in earlier columns, so I think now I should go into a little more depth on the subject, and explain exactly what Peak Oil really is.

Oil is created deep under the earth from dead animal life (mostly plankton) dating from the dinosaur age. The dinosaurs, depicted so well in Jurassic Park, would, under ideal circumstances, be in our gas tanks now. Oil isn’t something that can be created instantly, or even in an average lifetime – it takes millions of years. Oil itself is made of long chains of carbon atoms, with a lot of hydrogen attached. When it’s burned, it produces heat (which is what makes it useful), carbon dioxide (believed by many to be responsible for climate change and global warming), and water vapour.

Coal, incidentally, is created in much the same fashion, but is mostly plant material. It consists largely of carbon, but with other trace elements, such as radioactive uranium and thorium, and mercury, one of the deadliest poisons in the ecosystem. When it burns, it produces a lot of heat (more than the same mass of oil), a lot of CO2, and it releases various highly toxic elements into the air we breathe, the water we drink, and the soil we grow our food in.

There are two critical concepts about oil (natural gas, coal, etc.):

1. There is only so much oil in the world, and what we use will never be created again.
2. We have been using oil as an energy source, at an ever increasing rate, for about 150 years. Every year we use more than we did the year before.

When Will Peak Oil Happen?

Estimates vary, but the general consensus is that the world’s peak is now, plus or minus about five years, i.e. something between 2005 and 2015. The most optimistic forecast is around 2020, but these are estimates from the oil producing nations and the oil companies, who don’t want to see any panic which would bother their bottom lines.

Since around 1965, we have been using more oil each year than we have discovered. If one compares it to a bank account, we have been taking more out than we have been putting in. If we look at oil as a bank account, we’re heading for inevitable bankruptcy.

Peak oil is the period when the world’s production of oil is at its highest. After peak oil, it will decline steadily, year after year, until it is no longer economical to produce oil.

Many people, and almost all governments, think like economists, and this is what causes the problems. They consider a supply and demand situation. Put simply, if the supply of widgets isn’t enough to meet the demands of the market, the price will go up. As the price goes up, it becomes more profitable to make widgets, so another widget factory is built, supply meets or exceeds demand, and the price falls. Eventually, supply and demand will stabilise, leading to a relatively constant and fair price for widgets.

Most economists assume the same is true for oil. As supply goes down, price goes up. When the price goes up, it becomes profitable to extract oil which couldn’t have been extracted economically at the previous lower price. Production increases, and the price comes down for a while. If the price comes down too much, then the new sources of oil become uneconomical for the oil companies, so they stop producing it, supply goes down, price goes up….

This is what happened to the Alberta Tar Sands. Oil prices increased steadily, making it economical to manufacture synthetic crude from the tar sands; hence the boom in Fort McMurray, Alberta. After the oil price peak in 2008, prices nosedived, and oil plants in the tar sands started to shut down. Now, as oil prices are beginning a steady climb again, it’s almost full steam ahead in Northern Alberta.

In other words, supply and demand, just as economists predict with their widget model. The crucial difference, however, is that there is no theoretical limit to either demand or supply for widgets. And whilst there is no theoretical limit to demand for oil, there is very definitely a limit to supply, just as there is a limit to one’s bank account (even Bill Gates’s). The model breaks down – prices will go up, but the corresponding increase in supply is not going to happen.

Eventually, oil prices will be so high, no one is going to be able to afford it, big oil will go bankrupt, and nations which depend on oil, either as exporters or as consumers, will go bankrupt with them.

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