"What is peak oil?"

I distinctly remember the last time a reader asked me that question, I tried to offer him a solid answer. Before I wrote back, I couldn't help wondering how many people really understood what peak oil was. Back then, oil barely broke past $90 a barrel and we were being laughed at for assuming $100 a barrel would soon be considered 'cheap'.

Anyone still think $90 a barrel is expensive?

Over the weekend, the peak oil question appeared again in my email. This time, however, it was from more than a dozen of my Energy and Capital readers. I can only assume that as peak oil finally falls under the global spotlight, I'll continue getting the same question.

So in honor of those of you new to peak oil, here's a chance for you to catch up.

Peak Oil

Believe when I say that we could talk for months about the various aspects of the peak oil issue. For the sake of our newer readers, we'll stick to the basics.

Simply put, peak oil is the point when global oil production reaches its maximum rate. We're not talking about the total amount of oil left in the world (and I can't begin to tell you how many people have said to me with a straight face, "The peak oil theory is a bunch of garbage, there's trillions of barrels of oil left underground.").

The problem isn't how much oil is left, but rather the rate at which we can produce it.

If we were somehow able to put every drop of oil left in the world into one gigantic barrel of oil, yet were only given a tiny cup to draw out the oil, we'd be in a bit of trouble. Sure, the oil is sitting right in front of us, but we would be unable to get it.

Now, if I had to pinpoint when peak oil was announced to the world, in a heartbeat I would say, "March 8, 1956."

That was the day M. King Hubbert stood in front of a crowd at the Plaza Hotel in San Antonio, Texas and delivered his ominous speech. During the speech, Hubbert predicted that U.S. oil production would in the early 1970s.

You can imagine the response. After all, U.S. production that year was higher than ever before. But as you can see below, U.S. oil production peaked in 1970:

Although new unconventional plays like the Bakken formation in North Dakota are experiencing "a good old-fashioned oil boom," I doubt it will be enough to pick up all the slack. Don't get me wrong, dear reader, there's a lot of oil over there, and you can bet that producers are going to go after it. Actually, according to the Energy Information Administration (EIA), it's one of the few areas where domestic production is growing at a strong pace.

But peak oil in the U.S. is obviously in the past. Today, experts are predicting that global peak oil is right around the corner (a few even believe we've already passed it). Unfortunately, predicting the exact timing of global peak oil is a little tougher than you'd think.

What's the problem?

For starters, approximately 90% of the world's oil reserves are held by state run companies. It's kind of hard for me to watch Congress go after the major oil companies when those publicly traded companies only hold about 6% of the world's proven reserves (and don't even get me started on the ridiculous idea of suing OPEC, either).

If you made a list of the largest oil and gas companies in the world according to proven reserves, how far down do you think you would have to look until you recognized a company that isn't nationalized?

Unfortunately, most of the top oil producing countries consider their oil data a closely guarded secret, and without proper field data, all we can do is guess.

Then again, how can you not be skeptical of OPEC after they boosted their reserve numbers. Here's a look at one of my favorite examples of how shady OPEC reserves are:

Some countries managed to double their reserves practically overnight! Iraq even managed to significantly boost reserves twice in a five year time span.

Now let's take field decline into account...

Depending on who you're listening to, the average decline rate is between 4.5-8%. Not only do we need to find more barrels to make up for growing demand, but also the millions of barrels from field decline. Even taking the conservative rate of 4.5% (from CERA), that's still a considerable amount of oil.

Approximately 94% of our known oil comes from just 1500 giant and major oil fields. The problem, however, is that we aren't finding those giant oil fields anymore. In fact, discoveries of giant fields peaked back in the 1960s.

Whenever you hear about a massive discovery, there's always more to the story. Take the Tupis discovery off the coast of Brazil, for example. That field is going to take a long time and cost billions of dollars to develop.

Peak Oil Investing

You don't need to be an economist or geologist to realize that oil prices are inevitably heading higher. When the world is consuming 87 million barrels per day, yet it's stuck producing 85 million barrels, the price jump shouldn't come as a shock.

Now, I only scratched the surface of peak oil (like I mentioned earlier, this topic could go on forever). Next week, I'll give you a reason why the doom and gloom side of peak oil shouldn't get to you. The reason? Let's just say, peak oil is going to open up a number of investment opportunities for investors like us.

Until next time,

Keith Kohl

P.S. Even though U.S. oil production has been declining for over three decades, it doesn't mean you need to throw in the towel just yet. I know that most of my Energy and Capital readers have had tremendous success investing in the latest Bakken oil boom. If you're interested in joining them, you can learn more about the $20 Trillion Report 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.

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If your only concern is to try to make money, timing the production peak of oil may be for you. If you want to invest in your future by locking in a fixed energy cost for the next 25 years, put solar panels on your house today. You'll make a contribution to your community, save money, and sleep better since you won't be worried about picking the right moment for trading some financial instrument that you don't understand. The only solution for us as individuals and for all us as a nation is to use less petroleum. It is up to individuals to move us in that direction.

Maybe you have more readers and subscribers who, like me, have never traded. I read your technical and economic reports with interest and comprehension but how do I get started in trading? What does it cost up front? Presume "on-line" is best but can it be done with a slow dial-up. That's all there is where I live, except expensive satellite. Thanks

oh this probability game Mr. Richard surely sucks. The problem with these unmapped resources is they are getting late with time. They better start drilling now because were running out of time

oh this probability game Mr. Richard surely sucks. The problem with these unmapped resources is they are getting late with time. They better start drilling now because were running out of time

(1)First of all reserve estimates are just that - estimates. Care to hazard a guestimate on how wrong the experts have been with estimates?
(2)Oil continues to form.
(3)True or false: We have only explored 5% of the world's surface?
(4)Oil production in this country has not declined because we are running out of sites but because activist judges, kowtowing to environmental wacos, are restricting areas for exploration

I have been receiving your e-letter for several months now, and appreciate the angles you take and coverage offered.

However, I am astounded that nobody seems to be talking about natural gas and derivatives of such as alternative fuels. Quite clearly, this country is headed to a CNG and associated GAS TO LIQUID derivatives (methanol and DME)from natural gas - as it's the only realistic alternative to combat escalating TRANSPORTATION fuel usage.

I am curious as to whether or not you have a take as to why this country does not seem to openly recognize the inevitable.

thx

Eric Johnson

What is the ultimate reource for oil?How is this ultimate resource calculated and are these calculations reliable

Peak Oil is like many theories flawed by its definition parameters. It assumes that additional discoveries and infrastructure will not happen and that is flat wrong. It ignores the probable oil that will be found in as of yet unmapped China and Russia - nearly 1/2 of the land mass not to mention all the offshore that will be available with greater technology.