Have you ever heard of peak oil? If not, don’t feel bad, because you’ll learn a lot about it in the coming months.
Peak oil is a theory introduced in 1962 by King Hubbert, an oil expert who studied trends in the industry. Hubbert theorized that in the following decades, the world’s oil production would rise, peak, and then decline – like the shape of a bell; at that point, prices would rise. Hubbert believed the world’s oil production would peak at around 12.5 billion barrels per year in or around the year 2000, which was some four decades after he proposed his theory.
Hubbert was wrong about both of these predictions. Nevertheless, his theory is still studied, analyzed, and in some circles, supported. Adherents say Hubbert’s predictions were wrong because they didn’t consider advances that would be made in technology or political changes that would unfold in the following years.
But they say the essential elements of his theory – that the world has a fixed amount of oil and that over time finding more would become very difficult and expensive – is correct. They believe the world has reached peak oil and that we are heading toward a severe energy crisis.
“Global demand for energy has soared to unprecedented heights,” notes the web site End of the American Dream. “Production has struggled to keep up with demand, and now it appears that we will soon reach a point where we are simply not able to produce enough for everyone.”
Green Energy Gets The Nod
Many people hope green energy will supply the world’s growing need for power, but so far that hasn’t happened – certainly not enough to cut dependence on fossil fuels.
For example, many electric vehicle (EV) owners believe that these vehicles will help save the environment because they do not emit harmful gasses. However, most EV charging stations are powered by fossil fuel.
A better example is the shortages now affecting many countries in Europe, which shifted from oil without making sure they had enough green energy to meet demand.
Actually, Europe didn’t shift entirely to green energy – they simply became dependent on Russian oil and gas; and now they are paying shockingly high prices for energy, face possible economic chaos because of shortages, and the well-being of their economies and societies lies in Putin’s hands.
Despite the increasing use of nuclear, wind, and solar power, “the world is (still) powered by traditional forms of energy, which is oil,” says End of the American Dream. And even though dozens of countries are pumping oil, experts say a shortage is developing.
They Respectfully Declined
The top three producers of oil are the US, Russia, and Saudi Arabia; together, these countries account for some 45% of the world’s total production.
When President Biden traveled to the Middle East in July, he stopped in Saudi Arabia to meet with Prince Mohammed bin Salman, the de facto ruler. Biden tried to convince the Saudis to pump more to help lower prices and lessen dependence on Russia.
Biden was shocked by their reply: bin Salman said the Saudis were already producing nearly as much as they could.
According to Worldometers, the maximum amount of oil the Saudis can pump is 13 million barrels a day – and they’re already pumping more than 12.4 million. In other words, there is no quick, simple solution.
According to the Conference Board, since May 2020, when OPEC agreed to cut supplies, demand for oil has exceeded supplies -- according to some estimates, the shortfall is a million barrels a day.
Regardless of whether producers are cutting back to conserve their dwindling supplies, or simply for political reasons, it is not a good sign for inflation-weary consumers and businesses.
CNBC reports that natural gas in Europe is now six times more expensive than it was in July 2021; in dollar equivalents, gas in Europe now costs approximately $350/barrel. Consultants BFY predicted that heating costs in the UK in 2022 already are triple what they were in 2021 – and they are rising sharply.
Literally within hours after the Nord Stream 1 pipeline was put back in service, Russia cut shipments to only 20% of its total capacity – just half of the already reduced deliveries. This sent prices soaring back to the all-time highs.
Europe Without Energy
Statista cites a report from the IMF that if Russia shuts gas flow completely, the effects on European economies “would be disastrous.” Hungary, the Czech Republic, and Slovakia would be hit the hardest. Economic losses suffered by Germany and Poland would not be as steep but would nevertheless be severe. Even the UK, Ireland, Portugal, and Belgium, which are not as dependent on Russian gas, would suffer from a spillover effect.
Should America say these countries are far away and have nothing to do with us, or should we study developments there and learn lessons from them? Clearly the latter is the more prudent course.
One lesson is the danger of relying too heavily on other countries for our energy. The amount of oil now in the SPR (Strategic Petroleum Reserves) has been declining sharply. Total oil inventories have fallen by 438 million barrels since July 2020 – and there are no signs they will be increasing any time soon, according to a report in Zero Hedge.
In the short term, these draw-downs will help keep prices in check. But economists warn that in the long term, a deeper economic downturn may be needed to keep the oil market in balance – not a very exciting prospect.
Another lesson is the extreme measures some European countries are being forced to take to keep their economies afloat: using as much coal as possible, forcing energy rationing, burning wood in fireplaces, and cutting power - Germany has even shut traffic lights at nights to save energy.
The phenomenon of peak oil is very worrisome. Are you ready for this possibility? Fasten your seat belts just in case it's real.
Sources: bloomberg.com; cnbc.com; conference-board.org; dailymail.co.uk; endoftheamericandream.com; investopedia.com; statista.com; storymaps.arcg.com; zerohedge.com
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