The Best Selling Energy Book by Brian Hicks

What is Peak Oil? | The Authors | Reviews | Buy the Book!

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,

Brian Hicks

About the Authors:

Brian Hicks

Brian Hicks is the founder/president of Angel Publishing Investment Research. He has been a featured expert on CNBC, Fox Business, Fox News and CNN. Brian's articles have been featured in several industry respected journals and news publications and he urrently writes for the Energy and Capital daily newsletter. An e-letter focuses on investments in the energy sector.

Chris Nelder

Chris Nelder is a self-taught energy expert who has intensively studied Peak Oil for nearly a decade, having written hundreds of articles on politics and the oil/energy markets. He also founded and published an online magazine called Better World in the mid '90s, as part of his lifelong interest in sustainability. From the time he bought his first stock at the age of 9, through several years of working as a software developer for MSN Money, and on up to the present, Chris has been a staunch believer in solution-oriented investing.

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