Peak Oil is the point in time when global oil output reaches its maximum level.
Peak oil is entirely related to production rates. It is the point at which maximum production is reached, beyond which production declines.
A single oil field can serve as a simplified model for all of the oil fields in a country, or all the fields in the world. Before it is drilled, the field is naturally pressurized. If you drill a single well, the oil will flow at a certain rate. Drill more wells, and the oil will flow at a higher rate. This holds true until the underground pressure begins to decline, at which point the output from the field declines. This point occurs with the majority of the oil remaining underground, and the actual rate of recovery varied depending on the geology and production methods used.
M King Hubbert, a petroleum geologist for Shell, developed a statistical method for modeling all of the fields in an entire system. In 1956, he used his model to predict that U.S. oil production would peak between 1965 and 1970 (the actual peak came in 1970). Since that time, numerous parties have been trying to apply what is now known as Hubbert Peak Theory to global oil production.
In recent years, several oil industry insiders have suggested that the peak in global production is imminent. Kenneth Deffeyes wrote '"Beyond Oil: The View From Hubbert's Peak, which predicted the peak would occur toward the end of 2005. Legendary oilman T. Boone Pickens has been claiming we are at peak oil. Matthew Simmons, an investment banker in the oil industry, wrote Twilight in the Desert, which points to the possibility that peak oil within Saudi Arabia may be imminent. Several other books are available on the topic ranging from scientific inquiry to doom and gloom.
The difficulty in modeling a global peak comes from multiple factors. First, Peak Oil theory was developed to evaluate conventional liquid oil wells. Therefore, production from unconventional sources such as oil sands, shale, gas to liquids, and coal to liquids is not accounted for. Second, national oil companies do not think about maximizing their production; rather, they think about maximizing the life cycle of oil revenue for their company. Sometimes, they are just incompetent and unable to develop their resources properly. Also, many oil-producing regions are engulfed in chaos, resulting in lower oil production than pure geological factors would dictate.
It is often believed that technology has the potential to reverse peak oil after it has occurred. The proponents of this idea generally point toward CO2 injection to recreate the pressure in the wells, advanced drilling methods, superior seismic data, and the ability to drill in new locations such as ultra-deep water. Looking at the application of this technology in the U.S. over the past 38 years since the peak in U.S. production, it appears that the net result is improved recovery rates and greater overall production, but to date the U.S. has never returned to the same rate of production that was possible in 1970.
In any case, the only way to know that Peak Oil has occurred is in retrospect. The likely impact is difficult to assess. Most parties agree that if Peak Oil does occur in the next few years, oil will never be cheap again. The more important factor which will dictate pricing is whether supply outpaces demand.
Related Fool Articles
Recent Mentions on Fool.com
- Mining, Drilling, Natural Gas, and Oil: Stocks to Watch, and Stocks to Ditch
- The Crazy Economic Logic of the Oil Patch
- 4 Oil Trends to Be on the Lookout For in 2016
- 3 Reasons Why Hi-Crush Partners LP Crashed 49% in September
- An Awful Pattern Sends U.S. Silica Holdings Inc.?s Stock Down 27.7% in September
- 3 Catalysts That Could Make Royal Dutch Shell's Stock Soar