Peak Oil versus Peak Demand

I was listening to the Diane Rehm Show (NPR) this morning and there was a discussion about whether the energy industry has reached "peak oil,"--the point at which oil production peaks, subsequently leveling off, and then declining. While I did not have the time to listen to the whole discussion, the debate seemed to revolve around when oil production would peak. The years mentioned ranged from 2012 to 2030. However, I would propose that the argument is misguided. Debating when peak oil production will occur is a little like being in a leaky boat and debating when the volume of water coming into the boat will peak. It becomes irrelevant when one considers that the boat is adding people into the boat faster than water is being bailed from the boat; at some point the boat is going to sink, regardless of whether the boat has reached peak water intake. If people are coming on board faster than water is being bailed, the boat is going to sink. Indeed, if the water leak is fixed and people keep coming on board, the boat is going to sink.

In the same way, whether the oil industry has reached peak oil production is irrelevant: The "peak" point that is important to understand is when demand exceeds production. Once that point is reached (for world oil production, it has already been reached), what is important to understand is the "oil gap."

The oil gap is the difference between oil production and oil demand. As the gap increases, oil prices increase (price is determined by supply and demand). At some point, the price reaches a point were substitute energy sources become price competitive. This is the environment we are in today.

Therefore, the question becomes not when oil production peaks, nor when oil demand exceeds oil production. Rather the important question is when demand drives oil prices to the "tipping point" where alternative energy sources become cost competitive. At that point, those organizations developing alternative energy sources, particularly renewable or sustainable energy sources, become competitively advantaged in the market. Therefore, the debate should not be when oil production will peak, but when alternative sources become advantaged. At that point, those organizations that have been investing in alternative energy sources will be the hot stocks for the near-term future. The next Googles are out there ready to take off.