I know there's a small army of you that have been asking about the #1 spot on my "9 Things That'll Happen When Our Oil Runs Out" list. Don't think I'm copping out like Time Magazine did when they named "You" the 2006 Person of the Year.

But to be honest, the decision is a lot tougher than you would think. More submissions pour in every day, and I refuse to just grab one at random.

Yet there is something more important I've noticed coming from you.

The question, phrased in every imaginable way, comes down to: "What exactly is peak oil?" It made me realize that we have a staggering number of new readers. So let me ask you, "Would it be fair to go on without giving them a heads up?"

I don't think so, either.

For those readers who have politely asked to be filled in (and even for the more bull-headed ones too), the next few articles are for you . . .

Peak Oil 101: The Past

The U.S. was buzzing in 1956. Elvis released his first album and was introduced to the American music charts. A 29-year-old born Norma Jeane Mortenson officially became Marilyn Monroe. Four months later, she took the plunge with playwright (and hero of yours truly) Arthur Miller.

On March 8, a desperate phone call was made in San Antonio to a 52-year-old geologist working for Shell Oil Company. A worried public relations representative for Shell pleaded with the geologist (who at the time was ready to give a speech to the American Petroleum Institute) to censor a few controversial parts of his paper.

It didn't work.

That day at the Plaza Hotel in San Antonio, Texas, Marion King Hubbert delivered his speech, aptly titled, "Nuclear Energy and the Fossil Fuels." The information was chilling.

Picture yourself as an oil man back in the 1950s. The U.S. was producing more crude oil than ever before, a little more than seven million barrels per day. The 569 operating wells were pumping an average of 13,000 barrels per day per well. Life was good.

Hubbert's famous speech that day in the Plaza Hotel portrayed a grim future for U.S. production. He believed that the production of fossil fuels would follow a bell curve, predicting that U.S. oil would peak between 1965 and 1971.

His prediction was dead on.

U.S. Crude Oil Field Production (in Thousands of Barrels):

As you can see, U.S. oil production peaked in 1970, according to data from the Energy Information Administration (EIA).

Hubbert went even further, forecasting a peak in global oil production:

Peak oil isn't about the world running out of oil.

In fact, there's plenty of oil left. The world has consumed a little more than a trillion barrels of the estimated three trillion barrels believed to be in the ground.

Rather, peak oil is about the amount of oil that can still be extracted. The more oil we pull out the ground, the harder (and more expensive) extraction becomes. In other words, we're running out of cheap oil.

Take your average oil field. Production increases as the number of oil wells in the field increase. As time passes, older wells require more pressure. Eventually, the cost of operating those wells becomes too expensive.

The problem is that we're running out of those "easy-to-get" oil fields. Nine out the ten largest oil fields in the world have already entered into depletion.

And here's the problem . . .

Not only do we have to add new production to compensate for growing demand, but also to offset depletion rates. A few weeks ago, I brought up the subject of depletion rates. Accepting the International Energy Agency's (IEA) 4% depletion rate means the world needs to add more than three million barrels per day to its production capacity.

Now let's add our growing consumption to the equation. The EIA puts demand growth around 2.4% annually, tacking on another two million barrels per day. Assuming production at the world's largest oil field, Ghawar, is about 5 million barrels per day, that means we need to find the equivalent of one Ghawar every year!

Peak Oil Crisis?

Have we reached peak oil on a global scale?

If I had asked that question a few years ago, I'd have been laughed out of the room. Today, I'd see a few people nodding with a knowing look on their faces. Granted, we've only caught a glimpse of the peak oil theory so far.

To give you a full account of peak oil would take days, even weeks, but I won't leave you hanging out to dry. On Thursday, I'd like to move out of the past and into the present, asking whether or not the world has reached peak oil.

Until next time,

Keith Kohl

P.S. If you're interested in checking out Hubbert's original 1956 presentation to the American Petroleum Institute, you can find it here.

"Energy stocks... The only way a human is going to make any money."

-- Matt Simmons, Peak Oil's first and most vocal proponent,
and founder of the country's last pure play energy investment banking firm.

Follow the money trail. Sign up for Energy and Capital now.

Enter Your E-mail Address Below:

By signing up, you'll also get our latest report, The Truth About Oil.

Hi,

Mothers Day is coming!

I just discovered a webiste with a hidden Amazon promotion page with low prices and great gift ideas for Mother's Day.

Check it out under http://bargains-hunter.blogspot.com/2008/04/mothers-day-is-coming.html

Cheers!

Hello my friends :)
;)

What i find interesting about all the talk arrond oil peak,cost etc.is that it all seems to revolve arround fuel.Everything made from petroleum products are affected and look arround you,just about everything we use is made useing chemicals derived from petroleum.All the sugarcane,algea,seaweed etc.aint going to replace them.Think about all the industries that will be affected by the oil crisis.Interesting
Damian South Africa

sir
This is an exciting analysis and at the same time a warning to humanity. we must therefore seek other biooils like Jatropha since it is non-edible ...we are from India and we are at massive plantation of Jatropha and pongamia oil bearing trees with span of 50 and 100 years of life and greening is good for eco. Algae is another eternal gift by Nature.....so we must seek bioalgae fuels..
Alagarsamy s.a.

India

Thanks for blowing away that fog that enveloped me every time I heard "Peak Oil".

Why has it taken financial analysts, economists, politicians and others so long to understand
Peak Oil 101 ?

Are they "slow learners" on all subjects - or is geology just too difficult ?

Juan Siglo

What a good article - esp for 50+ years old. I would say he was bang on the money with his insights - all based on good simple maths.

I read with interest your opening paragraph regarding "9 Things That'll Happen When Our Oil Runs Out". As we anxiously await your results you very deftly sidesteped the question by using this very cleverly worded transition sentence 'Yet there is something more important I've noticed coming from you....' to lead us away and introduce us to a different topic.
I know you must be painfully reviewing the results while trying to make sense of the $100. oil that is fast becoming a reality.
I just want you to know we are still waiting....still waiting....
By the way I love your column.

Richard

"Rather, peak oil is about the amount of oil that can still be extracted. The more oil we pull out the ground, the harder (and more expensive) extraction becomes. In other words, we're running out of cheap oil."

This sentence indicatesd that peak oil has to do with how much extractable reserves are left, which is wrong.
PO only refers to the point in time when maximum production (extraction) is reached.
If the PO point in time has been reached, future oil production will never again be as high.
This of course co-insides with roughly half the total reserves being used up, as the remaining wells/fields have the poorer quality oil, low flow rate oil or hard to reach oil left.
As the world then scrambles to get the oil out in order to maintain economical status quo, the easier and better quality oil from there will be targetted first.
This basically sets off the death spiral whereby remaining oil is of worse and worse quality (sour, heavy, tarsand, shale) and more and more expensive to extract and refine.
The only balancer between supply and demand is price. So as supply shrinks and demand increases (or struggles not to contract as this would be deflation) price needs to move upwards.

Before throwing your money on biofuel companies, look at the NET return of the energy they provide and to what extent they can continie to provide biofuel after oil has completely been taken out of the equasion. (i.e. how will they do onece they can't use diesel for their own transportation, fossil fuels for mfg of pestisides etc)

There is a Swedish dissertation which was defended in 2007. It went into great detail to examine the large oil fields produce ~65% of the world's production. When they decline, so does the overall production. Consider the effect on the Mexican economy and the government's tax revenue now that Cantrell is declining and rather rapidly.

Excellent article. I heard about this before: a few years back, an article in "Scientific American" discussed future world oil production, stating it would peak in 2007, and would from then on decline, with oil prices steadily climbing: these prices now go through the roof at this very time,... and it will get a lot worse!