Last month, the world’s 4^th largest oil company—BP—predicted that the world will never again consume as much petroleum as it did last year. So, have we finally hit peak oil? And if so, what does that mean for our economy and our world?

There was fierce controversy in the first decade of this century over claims by petroleum geologists and energy commentators that peak oil was imminent (I was a figure in that debate, writing several books on the topic). Most of those early claims were based on analysis of oil depletion and consequent supply constraints. BP, however, is talking about a peak in oil demand—which, according to its forecast, could fall by more than 10 percent this decade and as much as 50 percent over the next 20 years if the world takes strong action to limit climate change.

Source: PeakOilBarrel.com; production in thousands of barrels per day.

Numbers from the US Energy Information Administration’s Monthly Review tell us that world oil production (not counting biofuels and natural gas liquids) actually hit its zenith, so far at least, in November 2018, nearly reaching 84.5 million barrels per day. After that, production rates stalled, then plummeted in response to collapsing demand during the coronavirus pandemic. The current production level stands at about 76 mb/d.

Many early peak oil analysts predicted that the maximum rate of oil production would be achieved in the 2005-to-2010 timeframe, after which supplies would decline minimally at first, then more rapidly, causing prices to skyrocket and the economy to crash.

Those forecasters were partly right and partly wrong. Conventional oil production did plateau starting in 2005, and oil prices soared in 2007, helping trigger the Great Recession. Afterward, however, there was strong growth in production of >unconventional oil from deepwater wells and Canadian oil sands, and especially from tight oil (also referred to as shale oil) extracted by horizontal drilling and fracking. The US, whose petroleum production rate had been generally declining since the early 1970s, hit new all-time highs as tight oil gushed from North Dakota and Texas.

After 2010, the focus of the peak oil debate shifted from supply constraints to demand reduction. Electric cars and climate action, it was claimed, would limit the world’s usage of petroleum, leading to falling oil prices and the eventual failure of the oil industry.

Even though early peak oilers underestimated the rise of unconventional oil through the “magic” of easy credit, and thus miscalculated the timing of maximum overall production, they did improve the public’s energy literacy with two key observations:

• Energy is overwhelmingly important. Energy flows are key factors in the development of both ecosystems and social systems. Mainstream economists make the mistake of considering energy merely as a component of GDP; in fact, the entire economy depends on energy. Further, nearly all modern manufacturing and distribution channels rely on fuels derived from petroleum.

• The depletion of non-renewable resources (such as fossil fuels) proceeds according to the low-hanging-fruit principle. The highest-quality and easiest-to-get resources are usually harvested first. Therefore, supply constraints are likely to be felt long before resources are exhausted. With energy resources such as oil, more effort (i.e., energy) is continually required to find, extract, and process each new increment of production than was the case with the previous one, resulting in a gradually falling energy profit ratio (measured as energy returned on energy invested, or EROEI).

In retrospect, by focusing so much on the dynamics of production, peak oil analysts largely failed to elucidate the subtler relationships between oil demand and the larger economy. Following the Global Financial Crisis, as the world rate of conventional oil production flatlined and the rate of unconventional oil production soared, they realized they had missed two important points:

• Commodity prices can give misleading signals with regard to future resource abundance. It had been assumed that petroleum depletion would inexorably lead to higher fuel prices. However, since world conventional oil production topped out 15 years ago, prices have seen all-time lows as well as all-time highs. If there is a general price trend at work, it seems to be for oil increasingly to become either too expensive for customers to afford, or too cheap to be profitable for producers. There is no longer a “Goldilocks” price that satisfies everyone. And that’s bad for both the global economy and for oil producers.

• Oil production levels are driven not just by geology and technology, but also by investment—and that adds another source of predictive uncertainty. In the wake of the Great Recession, central banks (notably the US Federal Reserve) pumped enormous amounts of new money into the world financial system while also keeping interest rates at historically rock-bottom levels. Suddenly, small oil companies pursuing marginal tight oil plays, who had been insisting that shale oil was a potential bonanza, had the ears of investors who were flush with cash and looking for the “next big thing.” Those same companies were able to take on loads of debt at ultra-low interest rates. As it turned out, very little tight oil was produced profitably in the subsequent years. If normal financial conditions had prevailed, there likely would have been no US shale oil production boom. But conditions were anything but normal, and the boom was deafening—while it lasted. Then, just as the fracking frenzy was reaching its geological limits (more on that below), another seemingly unforeseeable event—the coronavirus pandemic—came along, crushing global oil demand almost instantaneously.

Between 30 and 40 small-to-medium-sized oil companies have gone bankrupt since the pandemic began; over a hundred more are teetering on the brink. The Fed has bought up $355 million in oil company debt to stanch the bleeding. Oil prices are currently stuck at about $40 per barrel. The industry says shale oil production would be profitable with prices above $50; but with all costs added in, the real break-even price is probably closer to $60, and higher still for many producers.

Meanwhile, Shell and BP are promising to go “carbon neutral,” mostly via their efforts to use captured carbon dioxide in enhanced oil recovery (analysis suggests this is, at best, merely a carbon accounting “shell game”). The oil companies are anticipating a slew of new climate regulations if Democrats prevail in the upcoming election; they evidently figure it’s time to give their business model a coat of green paint.

Some commentators suggest that, if the pandemic is resolved soon, planes will resume flying, business will return to normal, and oil demand will hit new highs. That scenario seems unlikely, not only because a full recovery anytime soon is unlikely, but also because oil supply constraints could reinforce demand limits in ways that will be hard for analysts to untangle. For example, the bankruptcy of the shale industry could help precipitate another financial crisis, thereby driving down oil demand. In the subsequent hand-wringing in the financial press, there would likely be relatively little reflection on the role of simple resource depletion in the complex chain of failures and defaults that followed.

The fracking business was always a bubble. Financially, it required low interest rates and a conveyor belt of gullible new investors. From a geophysics point of view, tight oil production could be described as an effort to scrape the bottom of the barrel. Post Carbon Institute has published a series of technical reports by Dave Hughes explaining that tight oil plays consist of bounded areas where residual oil is trapped in source rock with low permeability. Individual wells deplete quickly, so many new wells must continually be drilled and fracked at great expense if overall production rates are to be maintained. Moreover, plays are characterized by small “sweet spots” of concentrated resource, surrounded by lower-quality regions that will likely never be profitable to drill. And, for the most part, the sweet spots already have been tapped. At the risk of oversimplifying Hughes’s data and analysis, it’s probably fair to conclude that, even if the coronavirus pandemic hadn’t hit, US shale oil production would be peaking in the near future.

Fracking was an encore for the oil industry’s spectacular performance over the past century-and-a-half. But there isn’t likely to be a second curtain call, as customers are leaving the theater. For those customers—that is, for society as a whole—there will be consequences. If we were going to have anything like a seamless transition to a post-petroleum future, we should have started it a couple of decades prior to the peak. As it is, it’s going to be tough going. Industries that depend on petroleum (particularly aviation, shipping, industrial agriculture, and trucking), and industries that rely on those industries (including manufacturing and retailing) likely will be hard-pressed to regain their pre-pandemic vigor, and over time will have to adjust to ever-tightening global flows of fuel. As will the rest of us who like to shop, travel, and eat.

A new era has begun.

Image: Camel train in the desert passing by a shipwrecked oil tanker named “Exxon.” A satirical image created in Photoshop to illustrate the concept of peak oil (2007). By azrainman via Wikimedia Commons https://commons.wikimedia.org/wiki/File:Exxon_desert_tanker.jpg