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June 16, 2009
Peak oil happens where supply can no longer met demand. The implication of this theory is that the era of cheap and plentiful oil is drawing to a close. If peak oil is one of those of these fuzzy events that you only know clearly when you see it through a rear view mirror, then the emergence of China and India, and their big demand for energy, means that, global oil demand will eventually outpace supply, driving up prices again.
Oil prices are now going to be structurally higher than they have been, given the geological limits. No doubt about it. The issue is not one of "running out" so much---there is still a lot of oil left-- as it is more of not having enough to keep our industrial economy running. The problem is that we are running out of cheap oil. There will be a gap between supply and demand, since there will be less to go around just as more and more countries want more and more.
The Energy Watch Group's 2008 Oil Report says that:
To increase the supply of oil will become more and more difficult, the growth rate will slow down and costs will increase until the point is reached where the industry is not anymore able to bring into production a sufficient number of new fields quick enough. At that point, production will stagnate temporarily and then eventually start to decline.
Peak oil is now, even though institutions close to the energy industry are engaging in a campaign trying to “debunk” the “peak oil theory”.
In the short term the rate of decline after peak is estimated to be about 2% per year. That doesn’t sound that drastic since we can make up the shortfall by taking measures to increase energy efficiency and avoid waste. We have created a society that depends very largely on a particular kind of energy. We are dependent on oil because of its versatility, liquidity -which makes it easy to move around- and also because we can make so many things out of it, including plastics and asphalt for our roads.
If the widespread use of fossil fuels has been one of the most important stimuli of economic growth and prosperity since the industrial revolution, then peak oil or a global decline in oil production means big changes in how we currently do things. Industrial civilization was based on the consumption of energy resources that have finite limits in quantity--oil, natural gas and coal.
Hence the need to reduce energy use, have a long term strategy of shifting to renewable energy resources and realize that we wont be powering the fleets of international air transport on wind power and we wont be repairing roads with solar power.
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Peak oil is not so much when supply can't meet demand as when they can't supply any more regardless of demand. It's a logistical concept, not an economic one.
Basic economics dictates that price will always ensure equilibrium between supply and demand. However it also assumes that if people are willing to pay a higher price, supply will increase. If increasing supply is simply not possible, the price will just go up indefinitely until people find substitute goods and demand subsides again.
There can be lots of social disorder during the transition period. The traditional response has been for the state to step in and impose price controls and rationing. Hard to see how that can happen with a global commodity like oil, which is why nobody knows how it will all play out and the speculators can drive prices up to stratospheric levels.