The Timing of Peak Oil is Unimportant

Peak oil theory rests on the idea that petroleum extraction will one day reach a peak—this is a fundamental truth, since petroleum is a scarce and limited natural resource. Ever since this idea was introduced in the 1950s, experts have been frantically trying to determine exactly when that peak will be reached and how much time we have afterwards until oil supply hits rock bottom. Yet the public is often misguided in reaching its conclusions about peak oil, as it tends to overlook the various external factors, which make predicting the “end of oil” so difficult. This page aims to demystify some of the biggest misconceptions and misguided implications surrounding peak oil.

Market Speculation

Peak oil has almost become a self-fulfilling prophecy in the markets, as “[e]ach time there is a short-term shortage of oil or the price begins to rise there is talk of running out of affordable oil,” writes George Wuerthner, a prominent ecologist and author.

In the midst of some of the biggest oil shocks in United States history, such as the oil crises in 1973, 1981, and recently 2007, peak oil became one of the central concerns propagated by media. Reasonably, the high oil prices was correlated to a impending shortage of oil.

However, according to Ismael Hossein-zadeh, professor at Drake University, as much as 60% of today’s crude oil prices are determined by the workings of Wall Street. That is, one of the primary reasons for the concern of peak oil, oil prices, is in fact driven by financial institutions of New York and London.

One of these “oil speculation powerhouses” is Koch Industries, whose intentions were let known to the public in April 2011, after ThinkProgress exposed documents linking Koch to purposely speculating oil prices, and consequently, driving them up.

Their activities began in 1986, when the first oil derivatives were introduced to the financial market. Koch and few other industries worked to deregulate oil speculations, and subsequently bought and sold products that helped skyrocket oil prices. Goldman Sachs later came out with a press statement, admitting that price of oil in the status quo is $20 higher because of such reckless speculation.

Even a June 2006 report by the US Senate Permanent Subcommittee on Investigations wrote:

There is substantial evidence that the large amount of speculation in the current market has significantly increased prices. Several analysts have estimated that speculative purchases on oil futures have added as much as $20­~$25 per barrel to the current price of crude oil, thereby pushing up the price of oil from $50 to approximately $70 per barrel.

The report goes on to add that speculators are buying futures contracts (a pre-arranged contract to buy or sell a certain commodity in the future), which results in higher prices of oil. This financially incentivizes oil companies to keep their oil in storage. An oil company will purchase and store oil even if it is expensive to do so, because they can expect oil prices to be much higher in the long-term—again, this rise in price is not necessarily reflective of impending shortages of oil.

Geology vs. Geopolitics

To consider peak oil as a mere geological issue is to ignore many of the systemic factors that give the theory a great portion of its validity. Often, the geological question of whether petroleum production will truly enter a terminal decline is shrouded by geopolitical factors, the Middle East being the primary example.

During the October War (Yom Kippur War) in 1973, where Syria and Egypt invaded Israel, Arab nations placed an oil embargo on the allies of Israel, America being one. Although the countries affected by the embargo attempted to increase their own production of oil, the inability to access 4 million barrels-per-day (Mbpd) had catastrophic effects on oil prices. The nominal price of oil per barrel had tripled from $4 to $12 in 1974, and increased further to $14 in 1976. During the Iranian revolution production decreased by 4.5 Mbpd, and following the Iran-Iraq war, oil prices skyrocketed all the way to $37/barrel in 1981.

At the turn of the millennium, the United States possessed a fragile economy and decided to bolster its petroleum production to reduce prices. However, by the end of 2002, the U.S. reached a record low amount of oil production, which made it more vulnerable when they decided partake in the Iraq war in 2003. With rapidly growing Asia consuming oil by the millions of gallons, prices increased to $25/barrel in simply three months and hit $40-$50/barrel in 2005. The graph below depicts the general trend that characterized oil prices and the prospect of peak oil during the late-20^th and early-21^st century:

Moving the Supply Curve

If the two previous examples demonstrated anything, it was that relying on oil price levels to determine how close we are to peak oil, as the media purportedly does, is fallacious.

Predicting a particular date at which peak oil will occur is increasingly obscure not only due to institutional factors (such as financial system’s price leverage or OPEC) but also because of two key developments since the theory was first conceived in the mid-20th century:

First, unconventional oil – also known as “alternative to conventional oil,” this term is used to describe the kind of petroleum that can’t be extracted using traditional means. There are three primary kinds of unconventional oil that lacked popularity in the past due to the costliness and complexity of the extraction mechanism.

i. Tar Sands – combination of clay, sand, water, and bitumen, this process of extracting oil from tar sands is deeply complicated; yet with new technological innovations, experts now estimate that the cost has been reduced from $20 to $8; Canada’s Athabasca Tar Sands  = estimated 1.8 trillion barrels.

ii. Heavy Oils – more viscous substance that can be processed using the same traditional extraction method but with much more refinement; Venezuela’s Orinoco heavy oil belt = estimated 1.2 trillion barrels.

iii. Oil Shale – they contain an organic material called kerogen, which can be heated and converted to oil produces, such as jet fuel, diesel fuel, and kerosene. While the processing of oil shade still remains a technical task, the end abundance of resources justifies the development of such technology.

Second, the recent developments in the area of oil extraction vastly improved the efficiency by which petroleum is extracted, advancements which are not considered in beliefs surrounding peak oil.

i. Directional Drilling – in addition to drilling right above oil wells, the miniaturized computers and sensors located in these new drills allow extraction to be done with greater accuracy.

ii. Horizontal Drilling – the wells for horizontal drilling are drilled laterally and can penetrate up to 8000 feet horizontally.

iii. 3-D Seismic Technology – the improvements in computer power for imaging oil wells beneath the earth’s surface, allowing much more data to be processed for the purpose of accurate drilling.

Changing Predictions

Ever since the 1950s, peak oil theorists have attempted to date the peak of oil, from the Secretary of Energy James Schlesinger under the Carter administration to the Association for the Study of Peak Oil in 1989, and many more. Still, oil remains the dominant form of energy in today’s world. In fact, global oil production has increased by 1.9 million barrels per day (or 2.2%) in 2013, from 2012, according to a study published by British Petroleum.

Peak Oil: Theory, Prophecy, or Fallacy?

There is so much uncertainty surrounding peak oil today, largely owing to the various external factors described above as well as the ever so rapidly evolving technological outlook in society. Will oil production ever peak? When will it peak? Has it already peaked?

This website poses a different question: does it matter? That is, does the particular timing of peak oil matter so much? It seems unlikely that we will exhaust our oil supply in the very near future—perhaps we might, but when oil will peak should not be our most important concern. Given that oil will ultimately deplete one day, we should instead focus on preparing for a world without oil and furthermore concentrate on how to transition into a more sustainable future of energy.

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