The Peak Oil Theory Explained

Peak oil is one of the most important theories of all time when it comes to economics. In a nutshell the theory says that at some point oil production will decline and prices will rise. When this happens it is going to have a dramatic effect on the global economy. Many experts fear a worldwide depression will follow the peak in oil production as high prices drag down the whole world’s economy. Others are less pessimistic but it is almost universal agreed that peak oil is a problem that needs to be addressed.

Basically the peak oil theory is that at some point oil production will peak, after which the amount of oil that is being produced will decline. It is believed that once the decline has started it will become a terminal decline and oil production will never again reach the levels they were at during the peak. When this happens there are going to be serious consequences to the world’s economy. Since the demand for oil is unlikely to decline it inevitably means that the price will increase, probably quite dramatically. This is a problem since the global economy is heavily dependent on cheap oil. If the price of oil rises dramatically unless we actually have viable alternatives available to replace it the price of everything is likely to increase. This will mean a loss of purchasing power and a significant decrease in the standard of living for most people.

An even greater concern is the lack of preparation for the peak. If we wait until the peak occurs before addressing the rising price of oil it there will almost certainly be an economic depression as a result. If we make an effort to develop alternative fuel sources before the peak so that we have alternatives when the prices do rise it is very likely that we will be able to deal with the problem. On the other hand if wait until the peak occurs and try to react to the reduced production and higher prices it will be too late for proactive mitigation of the high oil prices. Unfortunately it looks like this is exactly what we are going to do as remarkably little investment has been made in alternative energy sources.

One of the weaknesses of the peak oil theory is that it can’t really be used to determine when the peak will occur. Many years after the fact it will be obvious but the theory does little to predict the future. This means that nobody really knows when oil will peak. Some people argue that it has already happened while others argue that it won’t happen for at least another decade. Regardless the fact remains that it will happen and even the most optimistic predictions suggest that oil production will peak within the next ten years. Therefore action needs to be taken immediately to ensure that we are prepared for rising oil prices.