Ken Silverstein EnergyBiz Insider Editor-in-Chief

By any measure, oil is a finite source. As such, production will eventually peak and then begin to decline. Lots of smart folks disagree on when that time frame will be. The prudent response should then be to prepare for that reality. How so? Find new ways to diminish the reliance on oil by using greener alternatives as well as employ new technologies to get at non-traditional oils. They are those found in ultra deep waters and in oil sands, as well as coal-to-liquids and natural gas-to-liquids.

As developing countries get their legs, the demand for oil will undoubtedly rise. In 2005, global oil consumption rose by 3.5 percent, or 2.8 million barrels a day, according to the U.S. Energy Information Administration. Right now, the agency says that 84 million barrels of oil are consumed each day but it expects that number to rise by 103 million by 2015. China is a wildcard, which may see its oil consumption jump as a percentage of the world's oil supply from 8 percent today to 21 percent in five years.

What does it all mean in practical terms? Nations are clearly addicted to oil. As supplies dwindle and as demand rises, prices go up. Countries will be competing for a short supply of oil. For the United States that's a big problem: It has 2 percent of the world's reserves, consumes 25 percent of its oil and imports two-thirds of the oil it uses.

That's why all experts say that the matter of oil production must be addressed. Events such as Hurricane Katrina or a political or military battle in key Middle Eastern nations exacerbate the situation. Oil prices have been as high as $71 a barrel and in the United States consumers were paying as much as $3 a gallon for gasoline.

The U.S. Department of Energy predicts the peak will occur in 2037. But, in a report on the subject, it says that nearly all of the largest oil fields have been discovered and that production is past its peak in some areas. As such, the cost to find new discoveries is getting expensive. Alan Greenspan, the recently departed Fed Chairman, adds that new technologies will come to the fore that would likely mitigate some of the effects of peak oil. But, those developments will necessitate government assistance, he says.

"Even if we don't run out of oil, the federal government admits it may become phenomenally expensive," says the energy department's report. "Will the world ever physically run out of crude oil? No, but only because it will eventually become very expensive in the absence of lower-cost alternatives."

Common Ground

Since the 19th Century, people have said the world's oil supplies are nearing peak. But it was not until the 1940s and 1950s that this school of thought began to garner a following. Shell Oil geologist King Hubbert said oil production follows a "bell curve." That means the oil flows slowly before it begins to gather steam and then eventually decline.

At a congressional hearing held on the subject in December, Rep. Roscoe Bartlett, a Republican from Maryland, said oil production is falling in 33 of the world's 48 largest oil-producing countries. Within six more years, five more countries will peak, adds Kjell Alekett, president of the Association for the Study of Peak Oil and Gas, in Sweden. While countries such as Saudi Arabia, Iraq and Kuwait will have the potential to produce more oil than before, the physicist argues that it will be exceptionally difficult to offset the declines. Of note: Saudi Arabia allows no independent studies of its reserves, which makes it impossible to know exactly what its potential is.

"There is coming the time, sometime in the next decade, during which our global ability to produce conventional oil on a daily basis will hit a peak," says James Halloran, Wall Street analyst for National City Bank in Cleveland. "It will probably not be directly recognizable at the time, owing to ongoing improvements driven by technology, economic factors, and a gradual improvement of production of unconventional oils and other sources of energy."

The "rollover" at the peak to lower levels of production is likely to be gradual and not a sharp point capable of being broadcast at the time. But it will occur, just as surely as production has declined in the United States and in the North Sea, says Halloran. The phenomenon will occur throughout the world, as countries will be unable to beat back dwindling available supplies and increasing demand, now at six percent annually. "Those who think a peak in production will not occur in relatively short time, just because it has not happened before this, are in absolute denial."

Current Models

But Robert Esser, director of global oil and gas resources for Boston-based Cambridge Energy Research Associates, says that the world is not running out of oil anytime soon, if ever. Rather than envisioning a "peak," he says that there will be an "undulating plateau" in two to four decades. The current model to determine "peak oil" is flawed, he adds, and fails to incorporate technological, economic and regulatory evolutions.

He disputes the thinking that says global production will peak in the coming years, noting that his firm's analysis shows a substantial build-up of liquid capacity in the same time frame. An increasing share of oil supplies will come from non-traditional sources that include oil sands and from ultra-deep water. Indeed, he projects that world oil production capacity has the potential to rise from 84 million barrels per day now to as much as 108 million barrels by 2015.

"The major risks to this outlook are not below ground, but above ground (and come) in such forms as political turbulence, abrupt changes in contract terms and controversy over fiscal terms," Esser said in congressional testimony.

While the various positions can't decide when oil production will peak and begin a steady decline, they can agree that such a peak oil period is inevitable. The potential repercussions of that would be economically devastating. The common ground therefore appears to be the development of a multi-pronged strategy that reduces dependence on petroleum through new technologies and government support along with the innovations that will allow developers to search for supplies in more efficient and productive ways.

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