Peak Oil: What is it?

There has been a lot of talk for many years now about the dangers of running out of oil. Although it is unlikely that we will run out of oil in the near future we will likely see decline in the production of oil. This theory is called peak oil and it has serious implications for the world's economy. Peak oil is based on the idea that at some point the production of oil will peak after which the cost of oil will increase dramatically. This will have serious consequences for countries that rely on imported oil, which includes most of the world's major economic powers.

Peak oil simply refers to the point at which oil production reaches its maximum level and a decline begins. This happens because the demand for oil is constantly increasing so more and more oil will be produced to meet the demand. Once we have used up more than half of the world's oil supplies then production must inevitably decline. When this happens we will start to face the consequences of running out of oil. Peak oil doesn't mean we will immediately run out of oil, that will take many years, what it does mean is that the price of oil is likely to increase as the rate of production starts to decline.

The reason that the decline will occur is that the oil companies usually go after the easy to get oil first. This is the oil that can be found, extracted and refined at a fairly low cost. As the supply of oil decreases it becomes more necessary to extract the harder to produce oil, the undersea oil, the oil sands, oil in polar regions. Producing this type of oil only makes sense if the price of oil remains high enough. Since producing too much oil would lower the price to the point where it doesn't make economic sense to extract the difficult to get at oil production will decline. The result is that oil will increase in price and will be unlikely to go back down again.

Although the danger of running out of oil in the near future is fairly small there is a danger to countries that rely on imports of oil. Countries like the United States have economies that are built on the ability to get their hands on cheap oil. As oil peaks this will become less and less of a possibility. This is going to put a serious economic strain on their economy. We are already starting to see the result of this as the United States has gone from being the world's largest creditor to the world's largest debtor. This is in large part because of the extra cost of importing oil. More importantly the industries that rely on oil are moving overseas where they can get access to oil at a lower price. At some point it is going to become necessary to change the way we power the economy as we won't be able to continue to rely on oil. We can use water as fuel for example or just save on fuel to save energy.