Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. The concept is based on the observed production rates of individual oil wells, and the combined production rate of a field of related oil wells. The aggregate production rate from an oil field over time usually grows exponentially until the rate peaks and then declines—sometimes rapidly—until the field is depleted. This concept is derived from the Hubbert curve, and it has been shown to be applicable qualitatively to the sum of a nation’s domestic production rate and to the global rate of petroleum production. 

In the long term, there is no doubt that oil production will peak and decline. We are using oil at a much faster rate than it is being discovered, as shown in the following figure*, and eventually, the dwindling inventory will preclude maintaining current production.

Oil production in the United States has already peaked, as shown in the following figure, and oil consumption exceeded domestic production in the early 1990s. The rebound in production starting in 1977 was initiated by the completion of the Alaska pipeline and enhanced by Federal off-shore leases in the Gulf of Mexico. Without the pulse of Alaskan and off-shore Gulf of Mexico oil, the lower 48 oil production curve follows the Hubbert relationship more closely. Alaskan oil production has also now peaked, as has English production from the North Sea. Production of shale oil could mitigate the drop in US oil production by producing millions of barrels per day for hundreds of years.

 

There are numerous predictions about when world oil production will peak. One example is shown in the following figure. An interesting aspect of this particular prediction is that it separates the contributions of conventional and extra-heavy crude oils. It points out the difference in when peak oil occurs depending upon just exactly what is defined as oil. Conventional crude oil is very close to its peak, but production of unconventional resources will push the total peak out by 10-30 years. Oil shale could help push the peak oil production out many more years if it can be produced in an economic and environmentally acceptable manner.

 

A common area of confusion is the balance between production and demand. By definition, production equals demand, since there is negligible storage capacity for oil. The question is whether the supply is constrained by political forces outside normal economic forces, which distorts the natural balance. The temporary peak oil production just before 1980 was caused by political forces that constrained supply and forced prices artificially high. These high prices caused demand reductions, including efficiency improvements and a permanent shift away from using oil for electricity generation. Consequently, demand over the next 10 years could be met at lower production levels, which resulted in a dramatic reduction in oil price. The price decline continued until 1999, at which time oil was the cheapest in real terms for more than a century. In the future, as easily produced oil becomes scarcer, the price of oil will be influenced by demand as affected by global economic growth and constrained by the cost and availability of alternative energy and conservation. The resulting price will profoundly affect the timing and breadth of the peak in oil production.
 

* Williams, Bob., “Future Energy Supply – 1: Oil Depletion”.Oil and Gas Journal, July 21, 2003