Peak Oil: An Idea Whose Time Is Up

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Energy: Analysts have found that investors spooked by the peak oil theory — the belief that crude production has topped out and is in decline — are partly behind the soaring oil prices. Someone should set them straight.

Blame part of $135-a-barrel oil on the increased demand in China and India, where the populations and economies are growing rapidly.

But the impact of those nations on crude prices in recent months is suspect. Global oil consumption grew 2% in the first quarter of this year over the first quarter of 2007, while production increased 2.5% over the same period. On a daily basis, roughly 85 million barrels of oil are consumed across the world, almost exactly matching the amount produced each day.

Production over the next two quarters is projected to continue rising (3.3% and 4.1%, according to estimates from Citigroup), while demand is expected to grow at a slower 1.6% pace over the next six months.

These data don't indicate higher prices, so something else is at work. Some analysts believe that investors who have swallowed the peak oil theory are pricing oil higher because they fear the world is running out of crude and permanent shortages are nigh. They shouldn't believe it.

The peak oil theory was popularized by Shell Oil geophysicist M. King Hubbert. He predicted in a 1956 paper that U.S. oil production would peak by the early 1970s and then decline sharply. The peak oilers — many of whom quietly want the world to run out of oil — say he was right. But they're missing some key points.

Yes, domestic output has peaked. But it peaked at a level 13% above what Hubbert predicted. And the peak wasn't followed by a falling-off-the-table decline. Output rose after a temporary slide.

U.S. production is trending down again, but it's not because there's no oil. It's due to shortsighted policies that prevent the industry from drilling for the almost 100 billion barrels of crude known to be under Alaska's Arctic National Wildlife Refuge and beneath the oceans just off of America's coasts. It's because politics and political correctness block the development of Big Sky state oil shale fields, where as much as 2 trillion barrels of crude, by some estimates, sit idle.

It's possible that rather than falling for the peak oil theory, investors simply are considering the reality that Congress has done nothing to increase crude output, and that continuing on that foolish path will indeed bring shortages.

The U.S., though, is not the only nation that pumps oil. World output is expected to rise from 85 million barrels a day today to 110 million barrels by 2015, according to the International Energy Agency.

Cambridge Energy Research Associates argues that the remaining global oil resource base is 3.74 trillion barrels. That's more than triple the peak oil estimate of 1.2 trillion barrels. CERA also has noted that output will not fall as quickly as peak oil alarmists think. Many studies put the decline rate at 8% a year, but after studying 811 separate oil fields, CERA believes the rate to be about half that — 4.5%.

By the way, this estimate doesn't even consider undiscovered and untapped oil fields. Nor are unconventional sources, such as shale oil, part of the equation.

As if he had peered into the spring of 2008 and seen the run-up in oil prices, Peter M. Jackson, CERA's director of oil industry activity, warned in 2006 that listening to the wrong voices would have consequences.

"The 'peak oil' argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future," he said.

The "theory causes confusion and can lead to inappropriate actions and turn attention away from the real issues," Jackson continued. "Oil is too critical to the global economy to allow fear to replace careful analysis about the very real challenges with delivering liquid fuels to meet the needs of growing economies."

So far, all five previous predictions that we were running out of oil have been wrong.

But one day the crude supply will effectively dry up. When it does, it won't happen overnight.

It will happen slowly enough, though, for consumers to adapt (through voluntary lifestyle changes) and markets to respond (with improved fuel efficiency, technological advances in extracting crude and new energy sources). There's no reason for investors to act as if the world is running out of oil. It isn't.