(Note: Commentaries do not necessarily represent ASPO-USA’s positions; they are personal statements and observations by informed commentators.)

The concept of peak oil started as a geological theory* that went like this: if you knew the amount of oil produced in the past, the rate at which it was produced, and roughly how much oil remained under the earth’s surface, the theory could help you determine when oil production would likely start declining. Over the years however, proponents and critics alike recognized that more factors than just the size of oil resources and the ease of exploiting them would determine when world oil production would peak and plateau.

In the inimitable words of Frenchman Jean Marie Boudaire, “it ain’t the size of the tank [the resource], it’s the size of the tap.” And a veritable suite of factors can tweak “the size of the tap,” or how fast oil can be extracted or produced.

Wars impact production rates. Iraqi production is down because they’ve had bullets flying over their oilfields off and on for about 30 years. Nigerian rebel factions attack and take down oil production facilities with alarming frequency. Nationalism has converted most of the world’s oil reserves to state-controlled national oil companies that in many places produce oil inefficiently. International and domestic politics keep the efficient, well-funded, experienced international oil companies on the sidelines, away from many of the world’s best remaining oilfields. This plus rapid inflation in the cost of oil production equipment and operations has resulted in serious under-investment in projects to produce new oil in the four-years-and-beyond time frame. (The upside here: “inefficient production” will likely lower the ultimate world oil peak and lengthen the plateau production period, thereby giving us more time to plan an adaptive transition.)

It now looks as if a new factor has come into the game, one that could severely limit the rate at which new oil fields are developed over the coming years. This factor is the financial/liquidity crisis and the rapidly deteriorating world economic situation.

At present, financial markets are telling us that without a “solution” to the current credit squeeze, a major recession or worse is in the cards and that recent meager growth in world oil consumption will likely grind to a halt. But don’t bank on further large drops in gasoline prices as the OPEC cartel is already pondering production cuts to keep prices in around $100 a barrel. While OPEC may not be able to produce oil much faster, they (read Saudi Arabia and her closet
allies) sure can dial down production, force up prices and end up with the best of two worlds – more unproduced oil in the ground and more money in the bank.

Congress just passed a $700+ billion bill to free up the credit markets which were said to be totally or partially paralyzed. Some seem to think that in a couple of weeks, this bill will grease credit markets and the recession will be minimized. Many others, however, find this absurd. The US bubble economy appears to have problems measured in trillions of dollars, so bailouts in the 100s of billions are unlikely to have more than a short term impact. While an “affordable” bailout may eventually unfreeze some loans, it certainly will not solve the myriad economic problems that have been piling up for a long time. (Wake us when the housing bubble has fully popped.)

In recent months US and world oil consumption have been dropping due to high prices and the worsening economic funk. Whereas in recent years worldwide demand for oil increased by about 1.5 million b/d every year, that number will shrink to a few hundred thousand b/d annual increase for 2008. If the economic situation gets much worse, demand for oil probably will go into actual decline.

If, as seems likely, the omnibus financial bailout does little good and the world goes into a prolonged recession, then we probably are on the peak/plateau of world oil production right now. Demand will drop, production will be slowed, and new multi-billion dollar oil projects that are not already well underway will be delayed or cancelled due to lack of demand or capital to pay for them.

The world, however, will still produce on the order of 31 billion barrels of oil and other combustible liquids this year. That number would likely drop if the situation deteriorates, though we are still likely to be draining tens of billions of barrels from the world’s oil fields each year. But if current economic travails continue and new production projects slow, annual depletion will overwhelm annual new additions. Playing that scenario out, we would never again exceed the production levels we have seen in recent years. We would fall short of reaching 90 million b/d. Just keeping production levels flat may require heroic efforts.

Peak oil, however, probably has another even more important message for us. In recent days there has been much discussion of the “business cycle” and the “rebound” that has always occurred as each past downturn ended. Some believe that the rebound started last Friday with the passage of the bailout bill, others say in a few months, some say in “a few quarters,” or if you are really pessimistic, in a few years. No one outside of those who understand the meaning and imminence of peak oil recognize that the traditional business cycle of the industrial age is about to be turned on its head.

Talk of “rebounds” during an era when oil production will be declining shows a failure to understand a fundamental critical reality: we depend on prodigious quantities of cheap energy, especially liquid fuels, to run our cars, to farm and distribute our food, and to move people and goods by ship, train and plane. Unless we stumble upon some miraculous breakthrough—either in the world of energy supplies or financial market fixes, or both–we likely face a very tough economic transition that could last for many years. Softening oil prices of late will only serve to delay awareness about the need to proactively select a more intelligent transition path than the one we’re trapped on today.

Back in 1988, geophysicist M. King Hubbert, the father of the peak oil theory, said roughly the following during an interview: “we have a window of opportunity to change our oil consumption habits, but that window is slowly closing.

Eventually it appears that we’ll have to deal with a downward spiral of adversity before things can get better.” If Hubbert’s words sound prophetic, let’s work to make sure that his “things can get better” prophesy also plays out.

* Some supporters of the oil constraints story are troubled by the demeaning linked use of the words “theory” and “peak oil.” We’re not. Other notable and highly respected theories that make us feel that evolving peak oil theory is in good company include atomic theory, germ theory, theory of relativity, etc.

Tom Whipple writes a weekly peak oil column and edits this newsletter. Steve Andrews is a co-founder of ASPO-USA and publisher of this newsletter.