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Sunday, August 21, 2005

What’s Up at the Pump?
By Aaron Dunlap

Aug 16, 2005

Notice anything unusual at the gas station recently?

If you said yes, you’re not alone.

Across the nation & around the world, oil & gasoline have reached record high prices… and there’s no end in sight. Last year traders scoffed at predictions of $50 per barrel oil, until the price hit $50. At $66 per barrel today, last years prices have already become a fond memory.

I saw a report recently, which pointed to a gas station selling gas at $1.99 per gallon. How could this lone vendor be selling gas so cheap? The answer is a sign of the times.

Their pumps would only go up to $1.99.

So what is happening to oil prices?

Why so expensive?

Demand has grown to meet the available supply. Strong growth in consumption of oil, especially in the red-hot Chinese market, combined with anemic discoveries of new oil fields in recent years, has fundamentally altered the world oil markets.

As any first-year economics student can tell you, less supply & strong demand… means higher prices. These higher prices, in turn, provide a financial incentive for companies to find new sources of this highly profitable commodity. And for the last 100 years or so this has been the case. But what if something is different this time around? What happens if we simply can’t find enough new oil deposits to meet our growing demand? Just how high can oil go?

Welcome to peak oil.

Peak Oil is a term coined by geologist Colin Campbell, which describes the midpoint of conventional hydrocarbon production. Peak oil theory states: that any finite resource, (including oil), will have a beginning, middle, and an end of production, and at some point it will reach a level of maximum output as seen in the graph. In addition, the theory says that oil production, follows discovery of oil. We can only produce oil that we have found of course.

Oil production typically follows a bell shaped curve when charted on a graph, with the peak of production occurring when approximately half of the oil has been extracted. With some exceptions, this holds true for a single well, a whole field, an entire region, and presumably the world, after which oil becomes more difficult and expensive to extract as a field ages past the mid-point of its life.

In the US for example, oil production grew steadily until 1970 and declined thereafter, regardless of market price or improved technologies.

In 1956 M. King Hubbert, a geologist for Shell Oil, predicted the peaking of US oil production would occur in the late 1960's.
Although derided by most in the industry he was correct. He was the first to assert that oil discovery, and therefore production, would follow a bell shaped curve over its life. After his success in forecasting the US peak, this analysis became known as the Hubbert's Peak.
· The amount of oil discovered in the US has dropped since the late 1930s.
· 40 years later, US oil production had peaked, and has fallen ever since.
World discovery of oil peaked in the 1960s, and has declined since then. If the 40-year cycle seen in the US holds true for world oil production, that puts global peak oil production, right about now; after which oil becomes less available, and more expensive.
Campbell applies Hubbert's Peak to world oil production and estimates that approximately half of all oil that will be recovered has been recovered, and oil production may reach a peak in the near future, or perhaps already has.

Peak Oil is about the halfway point…

Almost nobody will argue that a peak in oil production won’t happen, they argue over when. There are a wide range of estimates for when peak oil will occur, from governments, companies & universities. The US Geological Survey estimates around 2030, while at least one Princeton professor contends we have already passed the peak. These estimates are only as good as the data they use of course, and that data is surprisingly difficult to come by, and of questionable accuracy. But before you dismiss Peak Oil as decades away, you might want to hear what some of these experts are saying.

I’m no Petro-Geologist by any means, and a born skeptic. It can be easy to dismiss some theories. But when noted geologists like Colin Campbell & investment bankers like Matt Simmons, oil insiders like T. Boone Pickens take this seriously… I’m all ears.

Dr. Richard Smalley, Director of Rice University's Nano Technology Lab and winner of the Nobel Prize in chemistry, thinks peak oil is very real. Lee Raymond former Chairman of Exxon thinks it's real. So does a report prepared for the US Dept of Energy. Representative Bartlett of Maryland thinks so to.

Still a skeptic?

Independent study of global oil production with the best data available indicates Peak Oil is as soon as 2007 according to the Association for the Study of Peak Oil. (

Making matters worse, is the very real possibility that one or more OPEC members have dramatically overstated its actual oil reserves; pushing the Peak Oil date even closer.

And perhaps the most chilling observation of all comes from Professor Ken Deffeyes of Princeton. That there is a point in time, preceding peak oil, where we lose the ability to steer clear of the most potent consequences of midpoint oil production; and that this happens long before the actual peak. It takes time to make real changes.

A sobering thought.

The jury is still out to be sure, and much heated debate about oil & oil alternatives continue. ( But with a growing list of credible sources weighing in, and pump prices skyrocketing, it’s becoming difficult to ignore the possibility that oil will become more & more expensive going forward, creating enormous challenges & opportunities for us. Fortunes have been made and squandered over less; nations formed & toppled.

The smart money is long on oil.

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