What is peak oil?
Peak oil is a theory that begins with an inarguable fact about oil: It's a natural resource we can't create or renew. Crude oil, also known as petroleum, is formed from the compression and heating of organic matter over time. Lots of time. We're talking millennia. Most geologists say our oil resources are composed of prehistoric algae and zooplankton, which is why oil is grouped in the category of "fossil fuels," all of which come from the remains of living things. Given that we can't make more, many people are understandably eager to figure out how much of the total supply of oil we've already tapped. Peak-oil theorists believe not only that we could one day run out of oil but also that world production has already hit its high point (or peak) and that supplies are now on a downward slope.

Once the global oil supply has peaked, extraction becomes more difficult and more expensive as prospecting companies and countries push further into inhospitable geographies and climates to find smaller amounts of oil. The concept of peak oil is important because this prediction of dwindling oil resources maps against a projected increase in demand for oil. Our global oil consumption-more than 80 billion barrels a day-is growing at a compound rate of about 1.8 percent annually and has been for some time.

So what?
If peak-oil theory is accurate, there will be consequences not only for the price of oil but also for the price of goods that contain oil, or rely on oil for manufacture and transport. In other words, pretty much everything. Oil is used in paints, lacquers, printing inks, lubricants, greases, medical products, toiletries, asphalt, roofing materials, floor coverings, waxes used in packaging, candles, matches, and polishes, and in many more products. The creation of petroleum products accounts for about 89 percent of total energy consumption for non-fuel uses in the United States, according to the National Energy Information Center.

Oil is also used to make petrochemicals: plastics, synthetic rubber, synthetic fibers, drugs, and detergents. And petrochemicals alone require 1.5 million barrels of oil a day. Finally, agriculture, commerce of all kinds, and any industry that relies on shipping are integrally dependent on oil: Ninety percent of all our transportation, whether by land, air, or sea, is fueled by oil. Ninety-five percent of all goods in stores involve the use of oil. Ninety-five per cent of all our food products require oil use.

Who devised the theory?
In 1956, Marion King Hubbert, a geophysicist working at Shell Oil, came up with the idea of peak oil. Hubbert predicted that U.S. oil production would peak around 1970. When that came to pass, the famous oil crisis of the early 1970s ensued. Hubbert also said world oil production would peak in 1995. He didn't take fuel-efficiency measures and technologies into account, however, and some analysts say that pushed back his estimated peak by ten to 12 years-in other words, until now. That's why peak oil is being paid renewed attention.

Is it empirically true?
To be sure, peak oil is a theory. Skeptics claim there is no proof that the world's oil supplies will ever run out; we just have to keep drilling for new sources of it. These skeptics say that peak oil believers are akin to-or actually are-conspiracy theorists in their belief that there has been a giant cover-up by governments and the oil industry about impending shortages in order to keep demand high. But if peak-oil theory pans out, it will, in fact, have a dramatic effect on economies around the world, because it will cost more to extract oil, and that extra cost will force prices for oil-and for all products reliant on oil-considerably higher.

What was Hubbert's formula for prediction?
The underpinnings of Hubbert's theory are rather technical and are based on the amount of oil that is produced per day. He believed that the world's total oil supply is similar to a single field in that the amount of oil in it is finite. The theory includes a formula used to calculate both a low-production estimate and a high-production estimate. Hubbert's low-production estimate predicted that U.S. oil production would peak in 1965 at 150 gigabarrels per day; his high-production estimate placed the peak in 1970 at 200 gigabarrels per day. As noted above, it turned out that the high-production estimate was accurate. But determining a peak-any peak-requires historical analysis after that peak is thought to have occurred. In other words, we won't know we've hit a peak until after we've already hit it. This leaves a question mark next to both peak-oil theory and the future of world oil production.

Has anyone else theorized about peak oil?
Other people have followed Hubbert's lead and also claimed that oil has peaked in terms of world production. Colin Campbell, a petroleum geologist who founded the Association for the Study of Peak Oil and Gas, and Kenneth Deffeyes, also a geologist as well as a Princeton University professor, are two of the leading peak-oil proponents. They claim that oil production has now reached its upper limit. (For another individual perspective on peak oil, click here to read our interview with Jeremy Leggett.)

Is there enough oil to meet current demand?
According to the most recent United States Geological Survey, worldwide oil production won't peak for at least another 30 years. And when and if it does, the USGS says, it won't fall off in the steep fashion that Hubbert predicted, but rather will flatten and then taper off for years. It should be noted that peak-oil theory doesn't claim world oil supplies will completely dry up. What it does argues is that new reserves won't be found, current supplies will diminish, and production will rapidly decline.

The variables that any peak-oil estimate has to take into account include the discovery of new supplies, the replacement of oil with alternative-energy technologies, and changing levels of demand. The most recent World Energy Outlook, put together by the International Energy Agency (IEA), estimates that global energy demand will increase by more than 50 percent over the next 25 years. The demand is coming increasingly from developing countries such as China and India. As it stands, world oil production to meet energy demands is running at about 85 million barrels per day. However, to meet the estimated growing demand, oil production will have to rise to more than 115 million barrels per day-an increase of about 25 percent.

If peak-oil theory is correct, and we are indeed on the downward slope of production, then extracting that amount of oil from a more limited supply will be extremely costly. And that cost will likely be reflected at the gas pump and in home heating bills. (About half of all the oil consumed in the U.S. is used for automobiles, and about a quarter is used for home heating; the rest goes to jet fuel, petrochemical products, and manufacturing.)

How much is oil projected to cost given all this?
The Energy Information Agency (EIA), which is part of the U.S. Department of Energy, projects that energy expenditures will increase between 30 and 50 percent between now and 2030. It projects that oil prices, depending on production, could range between $36 per barrel and $100 per barrel over the same period. (As of August 2007, the spot price for crude oil was just above $70 per barrel.) Regardless of price, oil imports will increase, the DOE says. However, non-OPEC sources of oil will account for twice as much oil production as they do today, the DOE estimates. And it believes that OPEC's oil production will remain somewhat consistent, varying only in order to influence oil prices worldwide.

If peak-oil projections are true, what will the economic impact be?
Consumer prices are directly affected by the price of oil. In fact, the EIA notes that oil prices track the Consumer Price Index (CPI), which is the leading gauge of the strength of the U.S. economy. When the CPI increases, it's a sign of inflation, or rising prices for goods and services. Higher prices slow the growth of the economy and can even lead to a recession, a situation in which the economy recedes from its current level of strength. The issue is about more than money, though, as higher energy costs highlight where supplies come from. The U.S., for example, imports about 60 percent of its oil from foreign countries-many of them in volatile regions. This creates a reliance on oil production that is largely out of Washington's control and that affects both national security and foreign policy.

How does peak oil relate to the environment?
Peak oil is about production and the cost of extracting oil from the ground. The more energy needed to extract the oil, the more carbon dioxide (CO2) released into the atmosphere-which, of course, accelerates global warming (the World Energy Outlook projects that carbon dioxide emissions will increase 55 percent over the next 25 years if energy demand keeps rising at its current pace). Also, drilling for new sources of oil destroys natural landscapes and habitats. Transporting oil can entail spills and leaks that wreck oceans, wetlands, and byways, as well as the fish and animals that live in those areas. New pipelines can destroy forests. Much can be harmed in the frenzy to replace oil supplies and meet demand.

Will peak oil affect me?
With energy demand rising, oil production falling, and the effects of global warming coming to bear, peak oil will hit consumers hard-that is, if the theory is correct and if no replacements are found for oil. The effect could be so great that some people, citing peak-oil fallout, have already begun to set up communities that aren't reliant on oil. These communities, which have cropped up from California to Europe, strive to be self-sufficient and self-reliant, unplugged from the energy grid. They power their homes and buildings with solar or alternative energy sources rather than with oil. They grow their own food, and get around by bicycle or in vehicles that use ethanol and other alternative fuels.

This approach is a bit extreme for most people. However, it may be an interesting preview of a world run on less oil.

What can be done?
To hedge energy demand against the prospect of peak oil's diminishing production estimates, alternative energy sources such as solar and wind power-as well as fuels such as ethanol, natural gas, and hydrogen-need to be developed. If alternative fuels began to replace oil as an energy source, it would lessen the strain on oil production that peak oil predicts. Policies that encourage more efficient production and use of energy can cut down on the amount of carbon emitted today from fossil-based energy supplies, such as oil, by up to 80 percent. These policies not only include further investment in and development of alternative energy sources but also call on consumers to become more fuel-efficient in their transportation habits and more careful about their use of electricity at home. The IEA reports that the policies most effective in reducing emissions also yield the biggest reductions in oil and gas imports.

Thus, the answer to peak oil lies in reducing our reliance on petroleum, and in turning toward sustainable alternative sources of energy. Hubbert himself foresaw this. Before he died in 1988, at age 85, he was researching solar power as a replacement for oil.

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