Peak Oil Theory

July 2, 2013

It is what we use to fuel our cars and jets, what we use to convert into propane and ethane for heating and cooking, and it’s what our farmers rely on to grow livestock and crops. And someday, we will suck the Earth dry.

The widespread use of fossil fuels has been one of the most important drivers of economic growth since the industrial revolution, allowing humans to participate in takedown or the consumption of energy at a greater rate than it is being replaced. As demand for energy and consumption rises in Canada as well as in China and in India, we suddenly find tight competition in discovering and extracting the very last ounce of black gold from the ground. Analyst refer to the Peak Oil theory to warn us of what is evidently going to happen given current consumption and our lack of adaptability in alternative energy.

First supported by M. King Hubbert using statistical models, peak oil is the point in time when worldwide production of conventional crude oil peaks in volume, which is expected to result in an increase in oil prices from a decline in the availability of cheap and easily accessible oil sources. So, imagine a bell curve representing oil production, peak oil would be at the very top and every point from then on after a slight plateau in production would represent a decline in oil production and subsequently in inventories. Hubbert was one of the first to predict the peak of oil production; he predicted in 1956 that production would plateau between 1965 and 1970. This obviously didn’t happen which had him recalculate to 1995, however, this didn’t happen again due to increasing demand for more fuel efficient cars and greener alternatives back in the late 80’s and early 90’s. Many analysts have followed in his footsteps and have argued that even if Hubbert’s bet was incorrect it still does not dismisses the fact that oil extraction is far limited and we will eventually run out it. Some optimists believe that we will reach our peak in 2020 however pessimists believe otherwise explicitly stating in renowned journal articles that we have touched the cusp of the peak in late 2004 and early 2005.

Inconsistent predictions make it seem as if this theory is flawed and we will therefore continue to run on limitless production or that peak production is nowhere in the next 100 years. However, keep in mind that Hubbert’s predictions were based on current demand and supply factor variables at the time it was formulated and were accurate to the tee given if current conditions persisted. Now, consider today’s global economy where Russia and Canada are now scrambling to the Arctic to extract whatever they can to sell it to the emerging markets that now have the demand to potentially uplift their economy. We will reach peak production soon if we don’t hasten consumption habits and aggressively respond to new sources of alternative energy.

Consider the following, if you plot population growth and consumption of oil for the last 50 years you will see a positive correlation between these two variables. The U.S. population grew exponentially between 1995 and 2005; petroleum consumption coincidentally grew from 17.7 million barrels a day to 20.7 million barrels a day. The peak of world oilfield discoveries occurred in 1965 at around 55 billion barrels per year and the rate of barrels have been falling steadily. Less than 10 billion barrels per year were discovered from 2002 to 2007. Oil peaking will adversely affect global economies, particularly those most dependent on oil such as Canada, as Energy accounted for more than 16 per cent of Canada’s exports in 2005.

We need to move fast to reduce the risk of experiencing liquid fuel deficit and apply mitigation efforts as soon as possible as it requires time for an economy to restructure itself.

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