Peak Oil is a Function of Oil Price

The Origins of Peak Oil Awareness

The scientific study of peak oil began in the 1950’s, when Shell geophysicist M. King Hubbert reported on the evolution of production rates in oil and gas fields. In a 1956 paper Hubbert suggested that oil production in a particular region would approximate a bell curve, increasing exponentially during the early stages of production before eventually slowing, reaching a peak when approximately half of a field had been extracted, and then going into terminal production decline.

Hubbert applied his methodology to oil production for the Lower 48 US states and offshore areas. He estimated that the ultimate potential reserve of the Lower 48 US states and offshore areas was 150 billion barrels of oil. Based on that reserve estimate, the 6.6 million barrels per day (bpd) extraction rate in 1955, and the 52.5 billion barrels of oil that had been previously produced in the US, Hubbert’s base case estimate was that oil production in the US would reach maximum production in 1965. He also estimated that global oil production would peak around the year 2000 at a maximum production rate of 34 million bpd.

Hubbert calculated a secondary case that if the US oil reserve increased to 200 billion barrels (about which he expressed doubts), peak production would occur in 1970, a delay of five years from his base case. Oil production in the US did in fact peak in 1970, so Hubbert is widely credited with precisely calling the US peak, but few know that he was actually skeptical that the peak would take place as late as 1970.

The US has now surpassed Hubbert’s most optimistic estimate for US oil production. Through 2014, cumulative US production stands at ~ 215 billion barrels, with a remaining estimated proved reserve of 48.5 billion barrels (but with the caveat this reserves estimate is based on crude prices near $100/bbl).

The Modern Peak Oil Debate

In the ensuing decades since Hubbert’s original work, discussion of peak oil ebbed and flowed. But the modern peak oil debates really heated up a decade ago. In 2005 the late Matt Simmons, an investment banker to the oil industry, published Twilight in the Desert. The book argued that Saudi Arabia had overstated its oil reserves, that its oil production was on the cusp of terminal decline, and that prices were set to soar.

Oil prices did in fact rise sharply in the 2nd half of 2005 — aided by Hurricane Katrina which hit Gulf Coast oil production in late summer. Oil production in Saudi Arabia also showed signs of slowing. This provided fuel to the fire for Simmons’ argument that the world was about to face terminal oil shortages. (My counterargument at the time was that the Saudis were purposely restricting production).

Simmons published his book in June 2005, and according to Google Trends searches for the phrase “peak oil” peaked in August 2005, but spiked again 2006 and 2008 when oil prices jumped:

Peak Oil Trends
Google Trends of Searches for the Phrase “Peak Oil”

Peak Oil Camps

At one extreme of this debate was the camp that believed peak oil was happening at that time (~2005), and that it was going to spell the end of civilization. This camp was often referred to as “doomers”, because they believed that humanity was doomed. (And many haven’t changed from that position).  At the other extreme were those who believed technology could continue to squeeze ever more oil out of the ground. This camp was sometimes referred to as the “technocopians.”

Most of us were somewhere in the middle. In 2005 I felt like we still had a few years to go before we reached peak oil. My general position was that we were 3-5 years away at that time, and I spent a lot of time debating the evidence with the imminent peakers. I wrote a number of articles addressing the topic of peak oil (e.g., Five Misconceptions About Peak Oil). My view was that peak oil would cause great hardship, but humanity would survive. We would muddle through and find our way.

Overconfidence in these discussions over peak oil (and peak natural gas) was prevalent. For instance, in 2003 Matt Simmons predicted, with “certainty,” that by 2005 the US would begin a long-term natural gas crisis for which the only solution was “to pray.” This sort of confidence was prominent in the debates. If you had argued at that time that by 2015 US and world oil production would be where they are today, you would have been deemed certifiably insane.

In hindsight, our view on peak oil was pretty naïve. Global oil production was not about to fall off a cliff. The potential for increased production was hand-waved away. But higher oil prices had a much bigger impact on production than most of us would have projected.

I had this idea bouncing around my head that higher prices would spur more oil production, but I agreed with those who argued that there were limits to this and we had to take steps to address the risks. The limits wouldn’t necessarily be technological, but would rather depend on the amount of energy required to extract and process the oil. At some point it simply becomes too energy-intensive, and even if you are using a cheaper source of energy to do the extraction, there comes a point that the cost of energy inputs exceeds the cost of energy extracted. Since the energy inputs and outputs are related via price, it’s a pretty good argument.

It’s Not That Simple

Jeff Rubin – the former chief economist at CIBC World Markets – eventually crystallized in my mind the relationship between peak oil and oil prices. I saw Rubin give a presentation in 2011, and he said something like “Peak oil is a moving target. I think peak oil is in a different place if oil is $150 versus oil at $100.” Then the notion crystallized. You can’t talk about peak oil without talking about oil prices. Why? Because this is what the real world looks like. From a 2012 research note from Goldman Sachs to clients:



Breakeven Price for the World’s Top 360 Oil Projects. Source: Goldman Sachs 

The graphic is pretty busy, but the bottom line is that there is a lot of oil that will come online at higher oil prices. How much is truly unknown, but it is estimated to be in the 10’s of millions of barrels per day. (For those who believe this is unlikely, think back to 2005 and how much chance you would have given for the current levels of oil production). Similar graphics have been produced for the break-even price in shale oil plays, and the message is similar: Higher oil prices will spur oil production in more marginal areas.

So we should really talk about peak oil as a function of oil prices. In that case, we can say with a pretty high degree of certainty “The world has passed peak $20 oil.” If we could magically freeze the price of oil at $20, we would see the sort of peak that the imminent peakers projected. That doesn’t mean that oil prices will never again fall to $20, as supply/demand imbalances do wildly swing prices at times. It just means that $20 isn’t a sustainable price for meeting current global demand. That also means that the average price of oil in the future will be much greater than $20, which is why I downplay those predictions of very low oil prices.

But has the world passed peak $100/bbl oil? The answer to that is clearly no. When oil was at $100/bbl, supplies were still rising. Now that prices are less than half that level, global production looks like it is set to fall. So maybe we have past peak $50/bbl oil.

The peak oil story turned out to be more complex than most of us who were debating it could have imagined back in 2005. What many thought was peak oil at that time was just one more cycle in the gyrations of the oil industry. When prices are rising, oil producers spend money as fast as they can to build out capacity. New oil plays become economical. Inevitably, supply outpaces demand and the price crashes. Capital spending slows, marginal oil plays are shut in, and demand catches back up to supply, which drives the price back up.

But what we have seen in this most recent cycle is that the trough isn’t as deep as it has been in the past. This time oil didn’t drop to $10/bbl, but it did spend a lot of time at $100/bbl. That is a sign that we are using up the cheapest oil supplies. The world is highly unlikely to return to an era of $20 oil. The floor has moved higher. Peak oil has moved past the $20 threshold, and most likely the $50 threshold.


To conclude, I want to make one thing clear. Even if there are sufficient oil supplies for several more years, there are many other good reasons for curbing our oil consumption aside from the danger of building a society based on an unsustainable resource. I have covered many of those reasons in other articles.

So don’t mistake this article for advocacy that growing oil supplies invalidate the concerns raised in the peak oil debates. The concerns are still correct. It’s just that the argument itself was too simplistic, and premature. Even though I tended to argue against the imminent peak position, my expectations about peak oil in the decade after 2005 also turned out to be much different than the reality that transpired.

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