What the End of the Age of Oil Will Mean to the Global Economy

Editors' pick: Originally published Nov. 15.

Imagine a world of 50% annual inflation, resource wars that span the globe and energy prices skyrocketing as oil reaches $200 a barrel.

This is what the "peak oil" theory predicted. And it shaped the opinions of scientists, policymakers and the general population for decades.

Recent history has shown, however, that the peak oil theory is dead wrong. It seems like the future will be shaped by the very opposite: peak demand.

Peak oil first gained popularity through a paper by U.S. geologist M. King Hubbert in 1956. Hubbert anticipated that U.S. oil production would max out in the 1970s before declining. Global oil production would last until the year 2000 before falling away.

Hubbert's theories were based on trends found in individual oil wells and oil fields. He noticed that oil obtained from these wells rose, peaked and depleted in the shape of a bell curve. He extended that same principle to global petroleum reserves.

When U.S. oil production did indeed peak in the early 1970s, "Hubbert's peak" won broad popularity. Petroleum consumers all over the world started to panic. The consequences of peak oil would be huge: skyrocketing gasoline prices, rampant inflation and fear that the world would be dominated by the biggest oil-producing countries.

Proponents of peak oil thought that the world's oil production had hit its maximum and was on terminal decline. Their fear was that soon there would be no more oil to take out of the ground. They felt that this end of oil could happen within 30 to 50 years.

While supply dwindled away, demand for energy would only grow as the world's population expanded. This would cause oil-poor nations' economies to crash while oil-rich countries would become increasingly powerful. Energy demand and petroleum prices would rise to unsustainable levels.

Fearing a future with less oil and higher energy prices, governments and entrepreneurs soon began research on renewable, alternative energy sources.

 

But peak oil is no longer a threat. Those who planned for a future based on this theory, including investors, governments and energy companies, must face a new reality. The global economy will be dictated by falling oil demand, not falling oil production.

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