The end of the 'Peak Oil' theory

About Latest Posts Scott PhillipsScott Phillips is The Motley Fool's Chief Investment Officer in Australia. He is Advisor of The …

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Remember the 'Peak Oil' theory? For nigh on 40 years, people have been predicting that oil production will soon hit a peak and begin declining, sending the world into an economic disaster.

Theorists – and documentary makers – were spelling out the doom our economy was facing as oil production declined over the next 100 years. Domestic production was already declining, and we had no plan B. Stock up on canned soup and ammo while you still can!

If you haven't noticed, the oil apocalypse has been delayed – again – and the doomsday predictors are undoubtedly eating crow while they concoct another mega disaster.

It's amazing how fast perceptions of our energy future can change. One day prevailing wisdom tells us that energy costs are going to rise uncontrollably as oil production declines and new energy sources fail to live up to their promise. The next, our problems are solved, and our reliance on oil appears to be evaporating before our eyes.

The oil scare that never goes away

We've been hearing about peak oil for years, and even some of the brightest minds in energy think the theory has some validity. But, like any other apocalypse, it never quite seems to unfold as the predictions assert. There are just too many factors that peak oil prognosticators can't account for in their bold predictions, so they always get them wrong.

It's a little like economic theorists who make their prediction under the old economists 'get out of jail free' card.

Cetirus paribus – Latin for 'all other things being equal' is the standard disclaimer for many economic theories. It's fine in theory, but we know the real world doesn't exist in a vacuum. In the house price debate, there are economists who assert that they would have been right, if the government or RBA hadn't intervened. But that's exactly the point… the theories are only useful if they reflect the likely reality that all else isn't equal

Innovation trumps conventional wisdom

One of the problems with peak oil predictions is that they have so little imagination. They don't consider the impact of new drilling techniques that open new oil fields to massive amounts of production. A decade ago, shale drilling wasn't a well-known technique outside of the industry, much less a major contributor to our oil production. Today drilling and extraction of shale oil is burgeoning.

Offshore drilling has also grown by leaps and bounds. Drillers are building ultra-deepwater rigs as fast as they can to unlock new fields off the coasts of Brazil, Angola, and other parts of the world that were once out of our reach, not to mention the ongoing extraction in the North Sea, the Falklands and off the US coast.

Then there are Canadian oil sands, which hold the second-largest oil reserves in the world, behind Saudi Arabia. These developments alone unlocked enough oil to delay peak oil for a few more years at least.

Evidence that these innovations have turned peak oil on its head is undeniable. According to Bentek Energy, North American oil production will top a 40-year-old peak by 2016. The U.S. Energy Information Administration predicts that by 2020, U.S. oil production alone will grow another 20% to 6.7 million barrels per day. Even OPEC's surplus oil production capacity is expected to increase from 2.55 million barrels per day in 2011 to 3.92 million barrels per day by the end of 2013.

It's hard to see how oil production could fall in the short term. And longer-term peak oil theorists have even more problems on their hands.

Alternatives make a peak irrelevant

For the last century there were very few alternatives to the black gold that flowed freely from wells around the world. Today the dynamic is slowly changing, squashing the fear that peak oil once garnered. If diesel fuel gets too expensive, transport companies now have an alternative in liquefied or compressed natural gas.

On the consumer side, manufacturers are releasing not only natural gas vehicles but electric vehicles, as well. Electric vehicles may not be for everyone, but as fellow Fool Alex Planes points out, the adoption rate has been even faster than that of hybrids a decade ago. These alternatives will play a role in curbing demand for oil, as will increasingly strict fuel consumption standards that are being imposed on car makers.

Woodside (ASX: WPL), Santos (ASX: STO) and Oil Search (ASX: OSH) – despite the latter's name – are all aggressively moving into liquefied natural gas, underpinning the changing dynamic in the energy market.

Foolish bottom line

In 10 years oil will no doubt play a major role in our energy picture, but the grasp it had a decade ago is slowly fading. Alternatives, efficiency, and new drilling techniques make the once frightful concept of peak oil nearly irrelevant. This isn't to suggest that prices will suddenly fall – in fact one of the key reasons peak oil will be staved off is that prices will rise (depressing demand) if and when volume growth begins to taper – only that a pending economic collapse because of a decline in oil production can be shelved for the time being.

Looking out beyond the next decade, it's hard to see how energy sources like solar, natural gas, wind, and even biofuels couldn't slowly replace our current addiction to oil. Sorry, peak oil theorists, this Fool is putting your predictions of doom to rest.

If you are looking for ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

Scott Phillips Is The Motley Fool's feature columnist. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Travis Hoium, originally appeared on

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »