What is "Peak Oil"?

"Peak oil" is a term used by people who pay attention to the energy sector.  It's also used by entrepeneurs like T. Boone Pickens.  If this is the first time you've heard of that, we'll talk a little bit about what it means and, more importantly, what it means for you and your family.

Have we surpassed "peak oil"? Ask that question to different people and you'll likely get different answers. Environmentalists would probably say yes we have, but they'll say it in the context of "that's why we need to invest more in renewable energy sources". That means expensive windmills and solar panels. Ask someone in the petroleum industry and they'll probably tell you we haven't yet passed it, but it's coming.

This term "peak oil" means the point at which we are extracting the maximum amount of oil possible from the earth. Put another way, once you reach the point of "peak oil", you can never increase the amount of oil you're finding and extracting. After you pass this point, your rate and total amount of oil taken from the earth will be in decline, up until the point that we completely run out of oil.

As you may guess, that's a big deal.  The earth's population is expanding and the demande for oil is increasing much faster than actual population growth, because third world countries with huge populations like China and India and Indonesia are only just now looking to tap into oil energy that used to be exclusively the domain of developed countries like the US and Great Britain.

The two important questions here are when will we really hit peak oil and what's likely to happen when we do pass it?

When will we hit Peak Oil?

Energy analysts thought we had hit peak oil in 2005, but oil production has increased since that time, so in hindsight we couldn't have hit it then. We know this because we know that in 2011, oil production numbers exceeded those from 2005. As with many things, the answer to this question depends on who you ask.

The most specific prediction in recent times came from the United States Military (the Joint Command). They sent a memo in 2010 out to various units predicting that, while not calling it by name, the peak oil point would occur in 2012.  Whether that happened or not is something you can't tell in hindsight, but you can only really find out after the fact when you look back and see how much oil you were finding.

One thing is also clear - predictions have been wrong before. The guy who first coined the term peak oil, M. King Hubbert, had his own prediction in 1974 that peak oil would occur in 1995. Obviously it did not, but why didn't it? Oil use dropped around the world because we made more efficient cars and a lot more people switched to natural gas and electricity for their power needs.  If you read the Bell Blog earlier last year, you remember we talked with the chief economist for Chevron and she talked a lot about how natural gas surpluses are radically changing our nathttp://www.bellperformance.com/Default.aspx?app=bizblogger&tabid=227554&subctrl=post&bid=113428&mid=380349ion's energy use.  Given the amount of natural gas we are finding available for us, the predictions for peak oil that call for it being near to us and past us could turn out to be wrong as well.

What happens when we pass peak oil?

The biggest effect will be on oil prices, which will shoot up because there won't be enough oil to satisfy demand. It may force people to switch to other energy resources like natural gas. Higher oil prices will, of course, represent higher cost of living for you and your family. Consider that without having passed the peak oil point, families in 2011 were spending about 2.5 times in transportation costs what they were spending in 2004 ($1,500 a year compared to $4,100 now). This is going to change people's behaviors. People will switch to more fuel efficient cars (just like they did when oil prices shot up after 9/11 and people started dumping their SUVs). Costs for food and electricity and heat will also rise.

Any hope for the future?

There are lots of people who believe, deep down inside, that the whole peak oil thing is overblown. Not all of them work for oil companies, too.  They may point to known reserves like off the US continental shelf that are worth over 100 billion barrels of oil alone. That's enough oil to keep our country going for many years. But that, too, will go away (plus only a certain percentage of that is oil we can actually get to, right now). Simple mathematics shows us we can't keep increasing our oil usage year after year and never reach a point where the amount of oil we find can't keep up.