Peak oil. It refers to the maximum rate of oil that is being pumped out of the ground at any given time. This commodity affects every aspect of our cushy lives, from our transport to our food supply to our consumer goods. One might even go as far as to say that we are â€œdependentâ€ on the stuff.
The idea behind the peak oil myth is that upon reaching â€œpeak oil extractionâ€ demand will be meeting supply. Once oil extraction starts to fall creating a lower supply we will see prices for oil rise, drastically. And as a result, the prices of everything will rise. When/if that happens we will be able to sit back and watch our standard of living drop as we spend more and more of our resources on energy costs while reaping less and less benefit.
The idea of â€œpeak oilâ€ was made famous by Dr M King Hubbert. He predicted that by the 1970â€™s US oil extraction would reach peak production. He was right. But when applying â€œHubbert’s principleâ€ to global oil output there is one major difference. The difference is in the â€œalternativesâ€. Once oil production became too costly, we could simply substitute our own production with cheap imports (assuming all things equal). This, in theory, would keep prices stable and allow the US to reach a â€œpeakâ€ in oil production. When this happened we switched from producing the oil that we needed to purchasing it abroad. On a global scale the same situation is â€œunlikelyâ€ to occur. We will need to make due with what we have, and that involves the drilling process.
The problem with this way of thinking is that it doesnâ€™t take into account how oil is extracted from the ground. Essentially there are three basic types of oil extraction:
- Primary: Once tapped, a naturally pressurized oil reserve starts pumping out oil
- Secondary: Using fluid injections to push oil out
- Tertiary: Gas, Chemical, or Microbial injection or Thermal recovery
The point in bringing up these different methods is not to try to understand the methods themselves but to get a sense of the economics behind what drives them. Itâ€™s basically a flashback to those economics classes you slept through in collegeâ€¦lets review, shall we?
Oil is an inelastic good. Meaning that the demand for it does not change (much) when the price changes. If that pair of blue jeans doubles in price you may choose not to buy them (elastic), but if gas prices double you have little choice if you still want to get to work the next morning (inelastic).
Proponents of the peak oil myth would have you believe that as world oil supply drops and is unable to meet our current consumption, we will see a sharp rise in price until our lifestyles drastically change or alternative energy sources become cost effective. This would make perfect sense if it werenâ€™t for the way we extract oil. As oil becomes scarce using Primary methods of extraction and supply drops, prices raise high enough to make the Secondary and Tertiary methods of extraction cost effective. There for keeping our thirst for oilâ€¦.well quenched (but expensive).
However, as this happens not only will hard-to-reach oil reserves become more cost effective, so will alternative energy sources. So we should in theory, be able to supply our energy needs with only â€œminorâ€ adjustments to our way of life. Although it is widely assumed that our luxurious standard of living will drop as the days of cheap energy become a thing of the past, there is that gleam of hope that alternative energy sources will one day meet our seemingly never ending thirst for low cost energy. Letâ€™s hope so.