Oil production can’t be expanded endlessly due to given geological restraints. At some point it will peak and then decline. Are we close to the global peak?
Crude oil is a finite resource. Certain conditions must be met or there isn’t any oil to be found. There must be source rock (which transformed organic material into crude oil). The source rock must have been inside the oil window (which is the term used to describe the surface between 7,500 and 15,000 feet below the surface), there must be a reservoir rock (a rock which contains the oil) and a cap rock (a rock which prevents the crude oil from coming to the surface where it would eventually evaporate). If any one of these conditions isn’t met, there is no oil. Furthermore, there is no oil below the oil window. Hydrocarbon chains (this can be oil or natural gas) of crude oil are broken into smaller chains below 15,000 feet, so there is no oil below the depth of 15,000 feet. You may find natural gas below the oil window, but no crude oil. So drilling deeper isn’t an option.
Furthermore, if half of the available crude oil has been produced, production will peak. This is the essence of Peak Oil theory, which is a proven theory. Some respected geological authorities believe that world crude oil production has actually peaked or will peak soon, depending of the number of crude oil reserves you use for the calculation.
The main message is that the old boom-and-bust cycle for oil may no longer be true as supply is restrained by geology and will no longer respond to higher prices, which used to lead to greater supply of crude oil on the world market.
The importance of this theory for investing is obvious. It should therefore be explored deeper as there is an ongoing battle between the followers of Peak Oil theory and some optimists who can’t see any shortage of crude oil.
The guy who invented Peak Oil theory was called King Hubbert. He was a widely respected authority in the famous Shell Laboratories in Houston in the 1950s. Peak Oil theory was only one of his valuable contributions to the science of oil.
Hubbert used the available data and predicted that US oil production would peak at the beginning of the 1970s. His forecast was made in 1956. Hubbert received a lot of scorn, and he just seemed to be another prophet in a long list of false prophets to predict that the party for US oil would soon be over. But Hubbert was right.