What is Peak Oil?

Prior to coming back to school for my MBA I worked for a bank focused on the energy industry. The bank was founded by Matt Simmons, likely the most vocal advocate of the Peak Oil theory. I remember when oil was approaching $150/bbl financial news channels had someone talking about the price of oil and its impacts to the economy almost daily, during this time Peak Oil was an extremely hot topic. Now that the financial crisis hit and oil prices subsided Oil prices and Peak Oil have not been talked about as much, but when I do hear people talking about Peak Oil it still seems that what Peak Oil actually is, is misunderstood.

Many people seem to think that Peak Oil is the theory that the world is running out of oil. While oil is a finite resource and every barrel we take out of the ground reduces the amount available, the consensus thought is that the world is not running out of oil any time soon. The world is running out of easily and cheaply available oil, which is different than just running out of oil. As technology continues to advance we continue to find more and more deposits in deeper areas of the ocean, or trapped in rock, and a number of other difficult to reach places. The problem with these new finds is that it becomes extremely energy and cost intensive to recover the oil. This is the basis of the Peak Oil theory.

The world has a lot of oil, but it is getting harder and harder to reach which will lead to a “Peak” in daily production. The idea is basically that Peak Oil is the maximum level of production the world is capable of after which we will go into decline. Again this is not that we have run out of oil, but we have run out of the capacity to produce anymore. Recently the CEO of Total stated that the company believes we are coming to Peak Oil. The article can be found here. Though the exact production level is highly contested as is the question of “have we already reached Peak Oil or not?” Total predicts that 89 million bbls/day is the Peak level. Others seem to think that Peak Oil was reached in 2005 as described here.

The effects of Peak Oil and how it is likely to come about due to the bell curve production follows are discussed at http://www.lifeaftertheoilcrash.net. The Energy Bulletin also has some interesting information on the Peak Oil theory.

Maybe it’s because I was working for a company that has been touting the existence of Peak Oil long before it became fashionable, or maybe it’s because the fact that we can’t keep up with our consumption is a fact that makes perfect sense, but whatever the reason I am a believer in Peak Oil.

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2 Comments

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2 responses to “What is Peak Oil?

  1. sgaurav

    The above blog is a good piece of information on Peak oil. But, I would add some more information on ‘Peak oil’ to make things more clear. According to M King Hubbert (Geologist with Shell oil company), who originally proposed the concept of peak oil production, the basis for the concept is[1]

    a) Definite/limited hydrocarbons in a specific region.
    b) cumulative hydrocarbon recovery is the area under the ‘production vs time’ graph.

    So, it is true that ‘production vs time’ graph will show some kind of maxima (a peak production) and then decline to zero production.

    Oil and gas takes millions of years to form from the source (dead living oraganisms) and is found in a geological time window (roughly 65 million years – 1 million years old). USGS (United States Geological Society) had undertaken a study[2] to assess the reserves of world oil and gas in 2000. Though the estimates from this study can not be exact (because of limitation of geographical interpretation and the data used for interpretation) but the estimates of oil and gas would be in the ballpark.
    So, if the same original concept of peak oil production by Hubbert is applied, world oil and gas production would peak some time.

    But, there are some fine points here,

    1) The typical oil recovery from oil reservoirs using available commercial technology should be around 20-40%[3], but technological innovations would push this limit further.
    2) Some of the available technologies are commercially not viable at low oil price, so the peak oil production depends on oil price.
    3) Peak oil doesn’t have to be a peak, it can be a plateau, where the peak production keeps going for some period of time.
    4) We should not worry about peak oil production because it is a fact. But the policymakers should know when the oil production would peak and at what production levels, so that they can take better policy decisions for energy security.

    References:
    (1)http://www.onepetro.org/mslib/app/Preview.do?paperNumber=API-78-O001&societyCode=API
    (2)http://certmapper.cr.usgs.gov/rooms/we/index.jsp
    (3)http://www.energy.ca.gov/process/pubs/electrotech_opps_tr113836.pdf

  2. sgaurav

    I just found out an error in my earlier reply to your blog-post. In the earlier blog comment, I mentioned that oil and gas are found in a geologic time window of 1-65 million years old.
    But that is not exactly true, as some of the oil and gas reservoirs are older than 65 million years.

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