What is Peak Oil – Everything you should know

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.