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Peak Oil FAQ’s

What is Peak Oil?

No, it’s not a peak in energy prices. Peak Oil is the point in time when all of the easy and cheap crude oil has been extracted from the earth and we must being to access the harder to produce more expensive crude oil. The term Peak Oil, or Hubert’s Peak, are the terms commonly referred to for describing the end of the era of conventionally produced, cheap, and easily accessible crude oil. The "peak" refers to the point in time a given crude oil well, field, or total global output, reaches its height of production and then begins on a path towards exhaustion. Depending on the size of the oil well this peak time period can range from very short to a few years in time. A more in-depth simplified explanation of Peak Oil can be found at: Wikipedia - search term Peak Oil.

Is mankind running out of crude oil?

No. However, we are running out of the ability to increase production by 7% - 8% each year to meet ever increasing global demand of about 2% - 3%. The other 4% - 5% is the annual decline of global crude oil fields as a whole.

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What are the implications of peak oil?

While I certainly won’t try to touch upon all the affects of Peak Oil will levy on the global society its most basic ramifications can be summed up with the following.

Any process or activity that utilizes petroleum will witness long-term sustainable price increases. Typically, most of pubic will realize the affects of Peak Oil at their local gas station or when they need to heat their homes. However, modern industrialized societies are heavily leverage on cheap oil and large sustainable price increases could have catastrophic implications. One example that stands out in my mind is:

Any large increases in energy market volatility could potentially jeopardize derivative books of large financial markets players such as banks and hedge funds. While many of these institutions enjoy “to big to fail status” the real question is “to large to fail or to big to bail? For example, one U.S. based institution has a hedge book, mostly interest rate based, with notional values that exceed $30 Trillion (no that’s not a typo). How much will $30 Trillion will buy now a days? Its a little over 3x the current annual GDP of the entire U.S.! One only needs to read the opinions expressed about off-exchange traded derivatives and their potential hazards by some guy named Warren Buffet to get a good grasp on the situation. Additionally, petroleum based products can be found in many products such as plastics, food production, and chemicals which would witness large price increases. By the way I’m typically no a pessimist either I usually see the glass as half full.

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Why is unconventional crude oil more expensive to produce?

As you reach deeper into any given crude oil well it gets more expensive both to pump that oil to the surface, and to process/refine it for traditional uses. Those who process or refine crude oil prefer the “light and sweet” varieties of oil that are low in sulfur content. Unconventional oil is heavy and high in sulfur, thereby, causing it to be harder to process which ultimately makes it more costly to refine into traditional products such as, unleaded gas and other fuels.

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We have decades of oil supplies left at current consumption rates as well as oil sands, shale oil, coal, etc. So why should we be concerned about it?

There is some truth to that but crude oil extracted from sands and shale is of the heavy variety and more expensive to produce and refine. Additionally, global demand is soaring so you can’t base what supplies will be left five years from now based on today’s demand. For example, China is most likely on the verge of being the world’s next superpower and unless you were living in a cave for sometime you have probably heard about their roaring economy. However, you may not be aware of this fact thought, less than approximately 3% of China’s population owns an automobile. How much time do you think there is before the citizens of China start craving the lifestyles as those in the East enjoy such as automobile ownership? Lastly, approximately half of all crude oil use is for transportation and I don’t see any Dr. Emit Brown types releasing a nuclear powered car on the market any time in the near future. Yes, there are electric cars out there but the concept hasn’t caught on for numerous reasons although is surely is a starting point.

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Won't technological advances and higher prices stimulate replacements of petroleum thereby avoiding any potential “oil crash”.

Yes and no. It’s the implications of new technologies that are the biggest problem. For example, a recent consultant’s report to the U S Department of Energy states that it would take about 20 years prior to Peak Oil to make a smooth transition from oil to other replacement fuels. Additionally, this report stated that a decade of preparation would be helpful but certainly would not avert potential massive liquid based fuel shortages as well as social and economic upheaval. Furthermore, there is no current, all-inclusive solution that can replace oil. Petroleum is utilized in so many different products that new time consuming advancements will have to be made on many different fronts.

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If this issue is important as you say it is, then why isn't conventionally media all over it?

Some claim there have been vested interests that didn’t want it in the news. Remember there are entities out they that must pay the bills and ensure hefty profit margins for those large media outlets thought advertising dollars. If not, they wouldn’t be in business. Although, I think, for the most part, it’s just a matter of ratings and the balance sheet. When oil was trading at $30/barrel, do you think most Americans would have been interested in watching discussions about Peak Oil or The Apprentice? However, as crude oil prices have steadily increased over the past few years the issue of Peak Oil is starting to be lent coverage more and more in the traditional media. For example, National Geographic, MSN, and the BBC have, in the recent past, given some coverage to the topic.

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So when is oil production suppose to peak?

That is a very difficult question to answer. Many petroleum geologists argue the time frame between 2004-2008. However, the majority of those that don’t agree with the first forecast are saying between 2010-2020. Why such a huge variation? Mainly, because of the inaccuracies that exist in current data regarding global crude oil reserves. Those that support the first Peak Oil forecast of 2004-2008 argue that large oil producing nations and oil companies have overstated their reserves. Especially publicly traded oil companies who are under the constant scrutiny of its shareholders.

One other item to keep in mind, even if global crude oil production has already peaked we won’t know if Peak Oil has been established until a few years after the fact.

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What is the best thing we can do to face the immediate crisis?

The most immediate and effective thing that can be done to delay an "oil crash" is to elevate, as much as possible, our transportation based use of crude oil for more critical applications such as plastics and other vital products. Furthermore, there is no current all-inclusive solution to replace oil. Petroleum is utilized in many products, therefore, new advancements will have to be made on many different fonts. Additionally, there are petroleum geologists who subscribe to the belief that we have discovered all the major oil wells, or elephants as there commonly called in the petroleum industry, we are going to find. Existing crude oil reserves are, for the most part, what we have left to work with including the Alaskan National Wildlife Refuge.

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Is Peak Oil presenting any financial opportunities for me to capitalize on?

Or how can I, at the very least, protect my financial portfolio from rising energy prices? Absolutely, for more information to these questions please refer to Peak Oil Basics - Part 3.

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