Oil Industry Overview - Peak Oil

Oil is an essential resource to our modern lifestyles. As the world's premier source of energy, oil generates 40% of the world's commercial energy. It has powered economic and population growth over the last century and a half. Ninety-five percent of land, sea, and air travel run on energy generated from oil. The Haber-Bosch fertilizer-creation process and many other fertilizer processes rely on oil. On a personal level, we need oil for our >automobiles, for our heating systems, and for our power supplies.

"Global demand for oil has increased seven-fold over the past half-century due to rapid population growth and industrial expansion."

According to estimates from the US Census Bureau, world population will continue to grow substantially between now and 2050.

In addition, industrial expansion, especially from emerging markets will drive up global demand for oil. For instance, China's oil consumption has grown by 8% yearly since 2002 due to higher standards of living, growing industry, and urbanization. As of October 2007, China is the second largest consumer of oil in the world behind the US. As for the future, India is on the brink of an economic boom and, with it, will come a substantial increase in demand for oil. In fact, India's oil imports are forecasted to more than triple by 2020.

On a global scale, these two drivers along with growing transportation and agricultural needs will lead to a substantial rise in worldwide demand for oil. According to the Energy Information Administration (EIA), world demand will increase 37% by 2030. As of May 2007, the world consumes about 83 million barrels of oil per day, and according to the EIA, global demand may exceed 118 million barrels per day by 2030.

The global rate of oil production (extraction and refining) has been growing nearly every year over the last century. However, most oil experts foresee this rate of production to peak and then decline in support of the peak oil theory. The peak oil theory does not claim that the world will run out of oil reserves, but rather, it claims that the rate of oil production will peak and then decrease substantially, possibly exponentially. The reason for this is that oil companies extract easy to reach, cheap oil first. However, once the world's oil reserves are half-empty (reached peak), the oil companies will have more difficulty extracting and refining oil from the reserves because the oil will be harder to reach and not as fresh. Many of the new oil discoveries will also be made in locations that are harder to reach. In other words, oil will primarily be found off-shore, in deepwater, or in small oil fields. These new challenges to oil companies will cause the global production rate of oil to decrease.

However, ASPO claims that global oil production has already peaked in 2005. Data from the EIA seems to support the latter prediction. From the graph below, it seems that oil production has already flattened. However, data about the oil industry, which is derived primarily from OPEC figures, oil company reports, and the USGS discovery projections, has been shown to be unreliable. As a result, I feel that a conservative estimate for when this peak will actually occur is 2010.

The world's demand for oil will continue to rise, the world's supply of oil will continue to crunch. As we know from economics, when supply falls and demand rises, prices sky rocket. These dynamics will make it difficult for developed countries to live at the same level of comfort and will hinder the growth of developing countries.

"There is no other energy source which provides the same convenience, versatility, and low cost as oil." With our current industrial methods, hydrogen, ethanol, and biodiesels take more energy to produce than the amount of energy they contribute. Other alternatives, such as wind and solar power, may be limited by physical factors. In addition, some processes are difficult to find a substitute for by nature. For example, it would be hard to replace oil with another energy source for air travel. Thus, alternative energy sources will take long periods of investments, even decades, before they can be widely implemented.

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