Implications of Peak Oil - Peak Oil Vs. Peak Cheap Oil

Peak Oil Vs. Peak Cheap Oil

Peak Oil refers to the point of maximum global oil production from all sources. While some analysts believe that Peak Oil has already occurred or will soon occur, this assertion is unprovable because future advances in oil exploration and production technologies could enable new methods of oil production not yet contemplated. But such advances are almost certain to involve higher marginal cost of production than conventional sources, meaning that new supply from these sources will come at a much higher cost.

The phrase Peak Cheap Oil, coined in 2006 by economist Eric Janszen, refers to the idea that relatively low-cost (below $50/bbl) oil production has already peaked and entered decline. The key concept is that while overall global production might continue to grow as a result of exotic non-conventional production technologies, conventional production has already peaked, and therefore the era of relatively inexpensive oil production has ended. Peak Cheap Oil proponents argue that for the purpose of economic analysis, the question of whether global production has peaked or not is almost irrelevant. Declining conventional production can only be replaced by far more expensive non-conventional production, meaning that oil prices are unlikely to ever return to their historic price range of $20 to $40/bbl. Many non-conventional oil production projects involve marginal extraction costs in excess of $70/bbl, leading some analysts to conclude that a new "price floor" has been created at this level. Proponents of the Peak Cheap Oil thesis therefore contend that the adverse effects of Peak Oil on the global economy are likely to occur before the actual point of peak production from all sources is reached.