Peak oil is loosely defined at the point in time when half of all the oil reserves in the earth have been extracted and burned.  This means that we are half way through the oil consumption cycle and move into extracting the remaining 50%.  Some of the most respected experts and oil geologists have long suggested that peak oil would occur in the early part of this century, that in the decade 2000-2010 we would move through it.  The expected symptoms would be a dramatic increase in price, followed by price volatility, with a long term ever upward pressure on pricing due to constantly increasing demand, combined with increasing cost of production, combined with a fully utilized production pipeline.  This certainly sounds like 2006-2007, and is evidence the believers in peak oil use to support their theory.

One of the key dynamics of this theory is that a lot of the oil reserves that remain cost more to extract that in the past.  In other words, much of the oil extraction of the past 100 years has been the ‘low hanging fruit’ like West Texas crude, which was near the surface and was therefore very cheap to extract.  What remains in the ground is heavier crude oil, or oil embedded in shale.  The long used technology of the past decades is not up to the task of this type of extraction, or if it was, the extraction is much more expensive, thereby closing the gap between cost of production and cost of sale.  If the cost of extraction and processing is too high, then it makes no sense to extract.  In addition to the closing cost gap there is also the energy equation of the extraction.  The energy to extract in the last century was a fraction of the energy produced by the petroleum extracted.  When that gap closes, when the amount of energy to extract and process approaches the energy produced, it makes less sense to go through the process.

The key dynamic on the consumption side is the ever increasing demand for petroleum products.  This demand has consistently been in the low single digits per year.  There has been upward pressure in recent years due to the explosive economic growth of China and to a lesser degree India and the European countries that were formally part of the Soviet Union.  Humanity has been on a long term upward consumption trend since the days of Rockefeller a hundred years ago.  This means that, in approximate terms it took  more that 100 years to reach peak oil, but that the second half of the reserves would take only 30-40 years to use up, depending on which expert you believed.  The simple math therefore is that if peak oil is occurring now, sometime between 2040 and 2050 humanity would, in essence have used up all available oil in the planet.

This scenario is one of the reasons that always finding ways to conserve energy and finding ways to develop usable alternative energy sources is so critical. It buys us more time. It is almost impossible to imagine what might happen to the US and to most countries should oil become prohibitively expensive, affordable only by governments and the ultra rich.  Given the global real estate development that has occurred around the automobile, the ease of life as we know it would cease.   This is why I have always been an absolute supporter of all efforts to develop innovative technologies for energy conservation, for changing energy usage habits and behavior and most importantly the development of alternative and renewable energy resources upon which an ever increasing percentage of humanity can rely.

The simple equation is that the more we do all of these things, the longer we have to avoid some sort of destruction and chaos to society.  I strongly believe that we must all embrace the vision of human innovation and technological breakthrough as the solution.  Whether it is the quest for the perfect battery, the move toward using fluorescent light bulbs or the increase usage of high speed Internet to help in telecommuting or frictionless commerce we must support everything that leads to lower dependence on petroleum.  This is not just about global warming it is about replacing our drunken, thoughtless energy consumption habits to avoid a tearing of the social fabric unprecedented in human history.

The most common reaction I get when this subject is discussed is that of starting to worry about what the lives of our children and most definitely our grandchildren might be like.  Most every one over the age of 30 will not have to live with the potentially dire landscape of living in a society constructed around the availability and use of cheap oil when oil become prohibitively expensive or not available at all.  Fortunately there seems to be some developing good news on the oil production front that points to the possibility of moving the end date of oil depletion back from mid century to late century.  We will look at this in the second part of this column.