Peak Oil

What Is Peak Oil?

Peak oil refers to the hypothetical point at which global crude oil production will hit its maximum rate, after which production will start to decline. This concept is derived from geophysicist Marion King Hubbert's "peak theory," which states that oil production follows a bell-shaped curve.

In the traditional vision of peak oil, the production decline accelerates as the cost of extracting new reserves grows. This would put pressure on existing reserves that are drawing down over time. If new reserves are not brought online more rapidly than the existing reserves drawdown, then peak oil has been reached. Peak oil has been declared several times, but each deceleration has proved premature because of new extraction technologies like hydraulic fracturing and better surveying techniques. 

Peak Oil Supply and Demand

Because oil is a non-replenishing resource, there is a limit to how much the world can extract and refine. However, the scenario of total depletion is just one version of peak oil. In theory, peak oil can be brought on by the production squeeze — the drawdown as new reserves get more expensive to extract. It can also be caused by a production decline when oil alternatives become more cost-effective, pricing oil out of the market and making it unprofitable to explore new reserves.

The Organization of Petroleum Exporting Countries (OPEC) brought peak oil to the forefront in 1973 when it orchestrated an oil embargo that exposed the United States’ vulnerability to a drop in oil supplies. Since then, peak oil on the supply side, either from total drawdown or difficulty of extraction, has been a major concern for energy-dependent nations. But this same fear spurred investment in exploration and technology, which has continually pushed peak oil’s projected date into the future.

Every time prices increase based on peak oil forecasts, the higher prices incentivize new investments in technology that postpone the peak. Of course, there is still a ceiling to oil extraction, but that may not be reached due to peak oil demand.

Peak oil demand refers to a scenario in production falls due to lower consumption, rather than scarcity of resources. This is especially likely if green technology and alternative energy become more cost-effective than extracting oil. In 2016, OPEC (the one-time bogeyman of peak oil supply) started to discuss peak oil demand as a possibility within a decade.

One possible indication of peak oil occurred in 2020, when U.S. crude oil production fell by more than 8%, the largest recorded year-on-year drop. The drop was largely attributed to low oil prices, due to reduced consumption during the COVID-19 pandemic. So peak oil is once again appearing on the horizon — just not for the reasons expected in the 1970s.

Peak Oil Predictions

There have been many predictions about when and if the world’s oil production would peak. In 1962, Hubbert predicted that global oil production would peak near the year 2000 at a rate of 12.5 billion barrels per year. Twelve years later, he estimated that the world would hit peak oil if the current trends continued. Both his theories proved incorrect.

Some analysts and industry officials have predicted peak oil before 2030, but making these forecasts isn’t always because of the difficulty in estimating the actual size of the world’s unexplored oil reserves.

Climate scientists have warned that oil is a major source of carbon dioxide, a driver of global climate change. A successful effort to curb global warming would likely require a reduction in oil consumption.

Possible Consequences of Peak Oil 

Some of the most obvious consequences of hitting peak oil supply are directly related to the economy. A sudden drop in oil supplies will lead to a sharp spike in prices, with a ripple effect in oil-dependent industries. Major sectors like agriculture could see a steep decline, due to the scarcity of oil-based fertilizers and fuel. The ripple effect could continue to shipping, transportation, and even the food and manufacturing industries. In a worst-case scenario, large areas of the world could experience famine because of higher food prices.

Peak oil would also have a sizeable effect on the climate, by reducing the carbon footprints of oil-dependent industries. Fossil fuels such as oil, coal, and natural gas are major sources of atmospheric carbon dioxide and a leading factor in anthropogenic climate change. A 2021 report by the Intergovernmental Panel on Climate Change (IPCC) warned that global temperatures have already risen by around 1.07 degrees Celsius due to human activity. Without "deep reductions" in carbon dioxide and other greenhouse gas emissions, global temperatures will likely increase by over 2 degrees Celsius before 2100.