Peak Oil Theory Revisited

Peak Oil Theory Revisited

By: Thomas Holst, M.B.A.

The term “peak oil” is part of geologist M. King Hubbert’s theory developed in 1956 describing the point in time when the maximum rate of global crude oil production is reached, after which crude oil production would enter into terminal decline.

Hubbert’s peak oil theory gained traction when he correctly predicted that U.S. crude oil production would peak in 1970 and then enter into decline.

However, recent developments have highlighted flaws in Hubbert’s peak oil theory.

The United States Energy Information Administration (USEIA) recently projected the U.S. will surpass the Saudis and Russians in crude oil production in 2018 and again become the world’s leading crude oil producer.  This event seems highly improbable for the generation of Americans growing up in the 1970’s who remember the 1973 oil embargo leading to a four-fold increase in motor gasoline prices, pushing the U.S. economy into a recession.

What were the flaws in Hubbert’s peak oil theory?

Hubbert’s theory was based on then-known crude oil producing reservoirs.  He assumed that all crude oil reservoirs capable of being produced were known in the 1960’s.  As a result, Hubbert incorrectly assumed the volume of recoverable crude oil would be finite and, at a future point in time, world crude oil supplies would fully deplete.

Peak oil’s flaw was failing to account for new technologies that would allow crude oil to be produced from rock strata previously deemed to hold no recoverable crude oil reserves.

Two examples illustrate this point.  First, advancements in offshore drilling technology, dynamic positioning equipment, and floating production and drilling units have made offshore crude oil reserves viable that were previously unreachable.  Globally, offshore crude oil production accounted for about 30 percent of total crude oil production over the past decade.

Second, shale rock was previously considered to be impermeable rock strata incapable of yielding up either crude oil or gas.  However, George Mitchell,  the father of shale production,  combined two previously known technologies (i.e., horizontal drilling and hydraulic fracturing) spurring the shale revolution in the United States.

How do these developments affect Utahns?  The mechanism for crude oil price determination has shifted.  The floor price for crude oil appears to be set at $25-$35 per barrel because the economies of some OPEC members are not sufficiently robust enough to withstand long periods at lower crude oil price levels.  At the other extreme, the price ceiling for crude oil appears to be set at $70-$80 per barrel because U.S. shale producers demonstrated that they can profitably operate at those crude oil price levels.  Possible scenarios under which this outlook may falter include global conflicts that impede global crude oil supplies or disruptive renewable energy technologies that replace fossil fuels.

Bottom line, crude oil price determination is no longer solely in the hands of the OPEC.

Thomas Holst is a Senior Energy Analyst at the Kem C. Gardner Policy Institute.

2018-06-27T11:19:01+00:00February 7th, 2018|Blog, Economics and Public Policy, Energy, Practice Areas|