Peak Oil -- When Do Equations Break

A couple times over the last several months readers have emailed me to ask if I have any thoughts on Peak Oil. For those not familiar with the idea, Peak Oil is the idea that at some point the world oil production will (as production at any individual oil field eventually does) reach its peak and begin to fall off. This in itself is not a controversial idea. So far as we are aware, oil is a finite resource, and we certainly are having to drill deeper, travel farther, and work harder to continue to produce more oil every year. Eventually (whether in a year or a hundred years) it makes sense that he'd hit a practical maximum point and the annual production would fall off from there one.

But if the idea that global crude oil production will eventually peak and go down is uncontroversail, the term "Peak Oil" is generally used to refer to something a bit more specific and a bit more controversial which we might refer to more specifically as the Catastrophic Peak Oil theory.

The question here is: how quickly would oil production fall off after the peak, and how much would the increase slow before reaching peak. And also: how well can the world economy cope with stalling and then falling oil production.

Those who take the Catastrophic Peak Oil theory seriously believe that it will stall fairly suddenly, and then begin to drop fairly steaply (or that the world economy is ridigly incapable of adjusting to a more gradually stall and fall.) By this theory, the entire world economy might collapse, with trade breaking down, cities being abandoned, a billion people or more around the world starving, and technology falling back 150 years or more.

Clearly, this preys on some of our most basic fears as members of an affluent society. In an agricultural, subsitence society, fears were basic and can be well summarized by a reading of ancient mythology. Would the weather be good -- or would there be drought or flood? Would the plants grow? Would pestilence wipe out half the village? Would war break out?

Today we live in a society with a highly specialized economy, and so much of what we deal with looks a little like magic. Food shows up in the supermarket. Gas is available at the pump. Money spits out of the ATM. A credit card can buy you almost anything. And yet, because the systems which deliver all these things are too complex to understand in all their details, we can't help but harbor (even if far below the surface) a certain fear: What if it all stops working? What if we go to the pump and there's no gas? What if we go to the store and there's no food? What if the whole magical system suddenly just stops?

The Catastrophic Peak Oil theory appeals to these fears. But is it likely?

My tendency is to think that the economic laws that drive our economy are more flexible than we sometimes imagine. And we are simply so far above the subsistence level in our society that we could go through a fairly catastrophic economic reorganization without starving. (Cuba's sudden oil dearth when the Soviet Union collapsed perhaps provides a micro example of how we might cope with such a peak oil situation.) So I'm fairly optimistic about our prospects, even if the global oil peak turned out to be fairly soon.

The point where equations potentially fail to capture a situation, however, is when change is very sudden. If oil levels off and begins to decrease over the course of a decade or more, we might go through some pretty hard times, but we'd find other energy source and/or tighten our belts and we'd be fine. The point where it's very hard to predict how we'd do is if oil peaked in a truly sudden fashion. Imagine that one day all the Saudi oil fields just stopped, like a spigot turned off. That's the sort of event that we really can't project the outcome of based on a supply/demand economic model. Fortunately, it's probably the sort of situation that's pretty unlikely to happen.