Peak Oil Theory

Since ancient times, human beings have used oil in a variety of ways. The Seneca Indians used the oil coming out of natural springs in Western Pennsylvania for medicinal purposes. In 1859, the area became home to the first ever oil well, drilled by Edward Drake. During the Iindustrial Revolution, oil gradually began to be used in lamps and furnaces, but it wasn’t until the advent of the motor car that demand for oil really began to take off. It is now the main fuel in virtually every kind of transport: not just petrol and diesel in automobiles, but fuel for ships, aircraft and trains all comes from oil. It is also widely used in heating.

As the world continues to industrialise rapidly, demand is increasing year on year, particularly in countries such as China and India. However, it is the US which accounts for the majority of the planet’s oil usage. 25% of oil used in 2006 was consumed in the US, and demand is still rising. It uses 15% more now than it did at the turn of the century. Although there is work being done on researching viable alternatives to fuel oil (evaluated elsewhere on this site), at present demand is going to continue escalating.

This poses a problem for a rapidly industrialising society, as oil is a finite resource. Although there is some debate among scientists, as to exactly how oil is created, there is agreement that it comes from plant fossils being compressed over many thousands of years under certain geological conditions. So far, this process has not been recreated successfully in a laboratory, within compressed time conditions. We therefore must assume that the oil currently in the ground is all we are going to get. The supply and demand of oil, therefore, has huge political and economic significance, and those controlling the supply can wield tremendous economic and political power.

Hubbert’s Peak

In a paper presented to the American Petroleum Association in 1956, the geophysicist Marion King Hubbert set forth a model, for predicting the lifecycle of oil supplies, both on a local and global scale. The thrust of his argument was that for any given area, oil production follows a bell-shaped curve. Given the ultimate recovery volume, (ie. the amount of oil in a particular area) and past oil production data, we can create models that approximate the date that ‘peak oil’ occurs.

After the discovery of oil and the beginning of the extraction process, production increases more or less exponentially, as more wells are drilled and more efficient methods and equipment become available. When half of the oil has been extracted, the supply hits the peak, and production begins to decline as it becomes harder and less profitable to extract the oil. Each side of the graph is symmetrical, and so production should decrease at the same rate that it increased.

Critics and failings of the theory

The theory was initially regarded with scepticism by the oil industry, but since then, has gained fairly widespread acceptance. This was helped by the fact that US oil production hit its peak in 1970, around the time that Hubbert’s model predicted. However, its usefulness is limited, as it requires the knowledge of the totality of oil reserves in existence. Although much of the ‘easy’ oil, (ie that which is inland, or offshore in shallow waters) is now discovered and drilled, there are potential reserves in other parts of the world, particularly in deep waters and under the (rapidly retreating) ice caps. A Russian submarine recently planted a flag on the seabed of the Arctic Ocean, claiming the land and any associated resource reserves for Russia.

Similarly, the theory doesn’t take into account, improvements in technology that make extracting oil cheaper and more efficient. Oil that 50 years ago may have been uneconomical to extract, could now be recovered because of the increased accuracy of surveys and the improved quality of drills and drilling methods. The original peak in global oil production was initially predicted to be in 2000 – this has now been pushed back to 2010. A 2006 report from the Cambridge Energy Research Associates criticised the usefulness of Hubbert’s model, saying,

“Despite his valuable contribution, M. King Hubbert's methodology falls down because it does not consider likely resource growth, application of new technology, basic commercial factors, or the impact of geopolitics on production.”

Hubbert’s model may work when everything else remains equal, but of course in real life they never do. A major war in the Middle-East, for example, would skew the graph dramatically as production would almost come to a standstill in the most oil-rich part of the world. This is the thrust of the CERA’s point about Hubbert’s failure to acknowledge external variables, such as geopolitical and economic events.

In a more basic sense, there are some who question Hubbert’s basic assumption that oil is a finite resource. In Russia and the Ukraine, many scientists subscribe to the abiogenic petroleum origin theory. This rejects the notion that oil comes from compressed plant and animal fossils, and postulates that oil is produced on a constant basis from chemical reactions among carbon deposits in the earth’s crust. Although this theory only held any sway in the former Soviet block, it is now beginning to find a serious audience in the west. In their book Black Gold Stranglehold: The myth of scarcity and the politics of oil Craig Smith and Jerome Corsi, two distinguished American academics, come out in favour of abiogenic production. They note that Russia and the Ukraine, where the theory has been most influential, has been transformed from a relatively oil-poor area to one of the most oil rich areas of the world, second only to the Middle-East.

Corsi also criticises Hubbert’s methodology. According to friends, Hubbert came up with the graph on the back of an envelope, and then tried to fit data around it, rather than the accepted scientific method of gathering the data, then designing a model to fit it. He also points out that subscribers to the theory have repeatedly made predictions as to when global peak oil would occur, only to revise them. Predictions have been made for 2000, 2005 and 2010. The theory’s subscribers point to the fact that new reserves have been discovered, increasing the ‘total recoverable volume’. Corsi claims that this is a weak defence, saying ‘If a theory’s predictions are wrong, then the theory is wrong.’

What does the theory mean for us?

The internet is replete with doomsayers describing a post-Hubbert’s Peak dystopian world with the human race on its knees.

Hubbert’s model itself doesn’t inherently foretell any disasters. However, when one considers the projected population growth for the planet, along with the rapid industrialisation of many large countries, it becomes clear that it seems likely that demand for oil will be increasing at record rates, just as oil production begins to go into an exponential decline. This massive mismatch of supply and demand will push prices of oil sky high. We have seen record prices recently, with light crude going for over $80 per barrel at the time of writing, and there is nothing to suggest that the upward pressure on these prices will ease, any time soon.

As petrol is so important to us in conducting our everyday lives, significant price increases will cause inflation in the economy, both nationally and globally. The cost of high oil is borne by everyone in society, not just motorists. As supermarkets incur increased costs as transporting their goods become more expensive, the prices of everyday items on supermarket shelves will go up. Also, one of the main counterweights to global inflation over recent years has been cheap consumer goods, manufactured in China. However, high oil prices will force up the costs of production in China, meaning the savings western consumers enjoy will be wiped out.

However, as prices increase, it becomes more economically viable for oil companies to drill for reserves that were previously too expensive. If oil prices were lower, the expenses of drilling and distributing the oil from this reserve would be too high for oil companies to stomach, but with prices where they are today, the margin is acceptable. As prices continue to escalate, other reserves, such as those contained within Canadian oil sands, which were previously too expensive to extract, will become viable, temporarily increasing the supply.

What can we do?

We must acknowledge that high oil prices are here to stay. Even if the Hubbert theory cannot accurately predict when peak production will occur, it is clear that demand is increasing as supply seems likely to decrease.

It therefore seems sensible to identify potential alternatives to oil, and I evaluate some of these elsewhere on this site. We should also seek to limit the amount of oil based products (ie petrol) we use, taking advantage of public transport and limiting unnecessary car journeys as much as possible. We can also use our democratic power to urge the government to change its policy regarding petrol prices. Whereas it is not within our government’s remit (nor should it be in a liberal economy) to regulate the price of oil, the current levels of taxation imposed on road fuel, only add to the burden on the economy. However. if the government is committed to imposing such a punitive level of taxation, effectively making life very difficult for certain sections of society, we must see evidence of what it is using these tax revenues for. Is it subsiding research work into alternatives to fossil fuel? Could it be doing more? Whether Hubbert’s theory is correct or not, we must ensure that our society can function with dwindling supplies of black gold.