The End of Oil

Since the turn of the 20th century, oil has become one of, if not the most, important energy sources in the world. It has caused wars, propped up economies and ensured that every new car is able to work. Yet all that may be coming to a worryingly swift end.

“Peak oil,” a concept derived from the Hubbert curve, is named after M. King Hubbert, who in 1956 successfully created and used mathematical models to accurately predict that US oil production would peak between 1965 and 1970.

At its most basic: oil demand outpaces oil production, causing a rise in prices and scarcity of usable oil.

Recently released reports seem to confirm the fear that a traditional system of accessing oil is well and truly over. For instance, the US Energy Information Administration (EIA) released a report in May, highlighting that tight oil production will slow in 2021, with a total US decline in oil production around 2040. That being said, the cynical view says oil production peaked as recently as 2006, with some — like the firm Douglas-Westwood — arguing that conventional oil system production peaked around 2005.

Indeed, as Visual Capitalist highlights in a recent infographic, the world could be looking at the decline of oil over the next 40 or so years.

The price of demand

Both China and the US remain the largest consumers of oil in the world. According to the EIA, China is the world’s second-largest consumer of oil and is projected to become the largest net importer this year.

The US has started shifting its focus to hydraulic fracking and offshore oil drilling as it seeks to compensate for increased oil demand. But environmentalists remain outspoken about the potential for environmental disasters caused by techniques used in both. That isn’t helped by prices for the technology remaining high, meaning more refined development is needed.

The cost for extracting oil has risen higher than revenues, causing a crunch for companies. According to a presentation by Douglas-Westwood, oil production costs are outpacing revenues by 2 to 3 percent per year, while profitability for companies is down 10 to 20 percent. For companies, that means it’s harder to turn a profit as all their work is consistently being outpaced by production costs.

Expensive production costs aren’t being helped by consistently high extraction costs. Reuters reports that about 65 percent of crude oil is left in wells because draining the extra barrels is either too difficult or expensive for companies.

What could lessen the impact

Decreased demand from conventional modes of transportation may help slow the use of oil and lessen the impact of peak oil. For instance, the EIA forecasts that a greater trend in light-duty vehicles will reduce the need for gas and oil consumption.

Further, as companies like Tesla Motors (NASDAQ:TSLA) grow and produce more vehicles, the EIA is betting on more drivers choosing energy-efficient cars. Additionally, more members of the younger generations are relying on public transport — as The Washington Post said back in 2013, peak vehicle miles driven on roads peaked in June 2005. Since then, there has been a sharp decline in Americans taking to the road.

Meanwhile, a group of Stanford University researchers and scientists argued in a report released in July that California will be able to switch all its industry, transportation and housing needs to wind, water and sunlight energy. They claim that the state won’t need oil by 2050.

Not so fast

Despite all those factors, several analysts and writers dispute the concept of peak oil.

David Frumm, a CNN contributor, dismissed the paranoia of peak oil back in March 2013, citing increasing oil production and commenting that the US could achieve energy self sufficiency by the mid-2030s. While he admits in his article that the supply of oil is not limitless, he argues that current inventory is more than enough to sate current buyers and, as the world loses its need for oil, there won’t be a problem.

Saudi Arabia continues to argue against peak oil, with officials from its state oil company saying that technological innovations will help oil output rise through at least 2050.

In 2007, Nansen Saleri, reservoir management manager for Saudi Aramco, said Saudi Arabia could boost its oil reserves by 40 percent (to 1 trillion barrels) in the next two decades. It should be noted that Saudi Arabia is the world’s biggest crude oil producer and relies heavily on the oil industry for economic growth. Petroleum and petroleum products account for a whopping 90 percent of its exports, meaning it has a lot at stake with the future of oil.

Time Magazine’s Bryan Walsh has pointed to the Canadian oil sands, deepwater oil in the Atlantic as well as tight oil plays in North Dakota and Texas, all of which have helped stabilize oil supply. Much like Saleri, he believes new technological advances will be able to help companies pursue new sources of oil.

Investor takeaway

For investors, the takeaway is that there remain many conflicting viewpoints about oil production across the world. Some say it’s just a fad that comes into popularity every few years. But with large, reputable agencies staking their reputation on the peak oil theory, it would be negligent to dismiss the concept without at least doing some digging.

Securities Disclosure: I, Nick Wells, hold no direct investment interest in any company mentioned in this article.