The spikes in oil prices during the last 12 months have reveled interest in the concept of "peak oil." The subject drifted to the back of people's minds as oil prices fell during the spring/summer economic lull, but has begun to return with recent strength in energy prices. Originally put forward within a domestic American context, in 1956, by petroleum engineer M. King Hubbert, the peak oil theory posits that the world is rapidly approaching the limits of its petroleum resources, and when it does, prices will rise into the stratosphere. It is certainly easy to see why the peak oil story gains currency every time prices rise appreciably. But however believable it is in each instance of oil price pressure, the historical record contradicts it, at least in a practical sense. What the record does support is the old saw, roughly paraphrased, that for 100 years, experts have forecast that the world will run out of oil in the next 10. Looking forward, the evidence, even more than it has in times past, stands against peak oil being realized, certainly anytime soon.

The Immediate Situation
It is clear enough that nothing in the recent price spike had anything to do with actual supply/demand issues, much less peak oil. The most dramatic price rise into mid-May and subsequent retrenchment had their roots almost entirely in the hopes and fears influencing speculative money flows. And these clearly had their beginnings in the Arab protests and revolts that so took the world by surprise. Though not all the countries facing dissent export oil, and many around the world take a cautiously optimistic view of how the protests might alter the geopolitical landscape of the Middle East, it is the uncertainties that had the influence on price. Few could see how the unfolding turmoil could raise supplies, and many could see how it might interrupt them, an imbalance of possibilities that prompted speculators to bid up futures prices and in the process raise spot crude prices as well. Gasoline and other distillate prices followed naturally.

The dollar's decline over this same time added to the upward pressure on oil prices. From September 2010 to May 2011, the dollar lost some 17.5% of its value against the euro, and even more against Japan's yen. Since oil is a global commodity, its dollar price, all else equal, tends to neutralize changes in the international buying power of the dollar, rising as the dollar loses exchange value and falling as the dollar regains it. But though the dollar contributed to the oil price move, it was a smaller piece of the picture than were the speculative fears over political turmoil. After all, oil prices between September 2010 and May 2011 rose almost three times faster than the dollar lost exchange value. Still, the direction of the U.S. currency certainly reinforced the already powerful upward price effects stemming from the Arab turmoil.

Meanwhile, the supply and demand fundamentals tended, if anything, to hold back the price advance. Profound as the uncertainties were and are, actual oil flows have continued largely unabated. WIth all the diruption, the Middle East and North Africa have continued to pump oil and sell it on global markets. Oil producers outside the affected areas were eager to capture rising prices, and rushed in to fill any gap in supply, real or imagined. Crude output actually increased through the entire period during which prices rose, growing at an annual rate of 1.5% during the first five months of the year. And because the price spikes marginally dampened use, global oil inventories, particularly crude, actually increased at an annual rate of over 4.0% during this time.

These fundamentals are what made prices so susceptible to downdraft last May. Although the political situation settled only slightly and the dollar made only modest gains, this fundamental backdrop allowed the equally restrained alteration in speculative positioning to create a remarkable crude price drop, amounting to almost 15% in the space of a week, from just less than $115 a barrel early in May to just more than $95 a barrel in the middle of the month. Afterward, prices fell toward $70 a barrel.

Taking a Longer View
The longer view of petroleum supply and demand suggests even less price pressure. Top of the agenda on the demand side is the slow pace of the world's cyclical recovery. Because the recession of 2008–09 was so deep and the recovery has been so slow, energy demands, even today some two years after the recovery began, remain about 4.5–5% below their past peak of early 2008. Especially with China and other emerging economies touching the economic brakes, the likely slow rate of global growth going forward has prompted the International Energy Agency (IEA) to estimate that it will take at least until 2012–13 before global oil use recaptures its former highs. Since supplies have actually increased since 2008, and will likely continue to do so, it will take even longer to return to any supply/demand fundamentals that could put significant upward pressure on prices.

Use Efficiencies
Technology has played a major role both in increasing supplies and in restraining demands. Efficiencies in energy use have, of course, emerged unevenly, as oil prices have risen and fallen over time, but on balance, they have enabled Japan and the developed West to produce considerably more with less energy and particularly with less oil. In the United States today, for instance, even large sport utility vehicles get better mileage than the average family car did in the 1970s, just before the first OPEC [Organization of Petroleum Producing Countries] oil embargo and the first oil price shocks. The United States can now produce more than twice the economic output from a barrel of oil than it could 30 years ago. Even within the past 10 years, efficiencies are so advanced that the United States today actually consumes less crude oil than it did in 1999, even though its ongoing flow of real economic output stands 20% higher.

No doubt the efficiencies will continue to build over time, but more significantly, the emerging economies now seem set at last to start implementing their own efficiencies. Because China, in particular, and also most of the emerging economies are highly inefficient energy users, the potential for savings is huge and should allow global efficiencies to outpace the recent past and the actual rate of technological advance.

Until now, many of these emerging economies have done little to economize on energy use. China, for instance, was growing too fast, and its need for power was too urgent, to allow its planners even to consider conservation or efficiency. On the contrary, China was so hungry for electricity, and its generating capacity so limited, that at times it actually burned crude oil in its generators, which is highly inefficient and, incidentally, very hard on the environment. But since China has largely caught up to its power demands, at least to a degree, and also contemplates a slower pace of growth, it will have room going forward to consider costs more than in the past and to start implementing available fuel efficiencies. Similar changes will likely occur in India and other parts of the emerging world.

Many emerging economies have particular reason to seek efficiency now, one that did not exist previously. For years, most emerging economies, India most notably, subsidized energy prices to industry, utilities, and consumers as well. It was easy to sustain the subsidy while energy prices stayed down, but in 2007–08, as crude rose toward $150 a barrel, these costs put tremendous strains on public budgets; they were so heavy, in fact, that these governments either abolished the subsidies altogether or moderated them substantially. While the subsidies were in place, of course, users of energy in these countries—industry, utilities, and consumers—had little reason to economize. But now with the subsidies gone or much reduced, all these energy users face much, if not quite all, the expense of the price increases, and so will more readily embrace efficiencies and economies, especially since to do so they need only import existing technologies long since developed in Japan, Europe, and the United States.

At least one other factor will further slow the growth of global oil use. A definite and ongoing shift is underway, away from oil, particularly in electricity generation, and toward natural gas, nuclear, and alternatives. To be sure, the nuclear accident in Japan has put a damper on once-ambitious plans to revive nuclear generation. Germany, for example, recently announced its intention to shut down all its reactors over the course of the next five years or so. But few other countries, including increasingly important China, have turned away from nuclear. Even Japan speaks of rebuilding its electric-generating capacity around nuclear.

Meanwhile, natural gas has gained ground on oil as the fuel of choice in electricity generation, because new finds promise greater reliability of cheaper supplies and because the gas burns cleaner than oil and so has a more favorable environmental profile. Gas already, even before the recent supply surge from shale, had gained from barely over 10% of total fuel use in the 1970s to more than 21% of all energy use today. This shift toward gas seems set to accelerate, if anything, and, as in the past, the growth of gas will largely replace oil.

Under such influences, oil has already fallen from almost 50% of energy use to about 42%. According to the IEA, it will drop below a 30% share by 2030. No doubt alternatives, such as wind, solar, and biomass, will grow over time to replace oil, too, but they are and will remain a relatively small part of the picture. Certainly, they do not factor large in IEA projections.

There is, of course, also always the possibility of relief from technological breakthroughs. Transportation is particularly important in this regard, as it accounts for more than 61% of all oil consumption. A viable electric car, for instance, or any replacement for the gasoline engine could cut oil use considerably, as could any change that reduces reliance on the automobile. Research and prototypes of electric cars, though exciting, have not gone nearly far enough to use as a basis of future oil use forecasts. Still the bias certainly remains on the side of greater not less relief from such sources. President Obama's perennial favorite, high-speed rail, has a similar character. To be sure, that technology already exists. But even if all states, cities, and nations were suddenly to embrace this transportation alternative, and that is far from assured, it would take years before rail could have a significant impact on oil use.

Brightened Supply Prospects
Meanwhile, energy supplies will likely rise faster going forward than in years, maybe decades, past. Of particular note is Brazil's huge offshore oil find in 2008. With reserves conservatively estimated at 33 billion barrels, it constitutes the biggest oil discovery in 30 years and already counts as the world's third-largest reservoir of oil. Though Brazil became energy self-sufficient in 2006, this new field, as it gets developed, will almost certainly make Brazil a powerful exporter and add significantly to the flow of petroleum onto world markets. Obviously, these reserves raise the peak oil hurdle.

Perhaps even more significant is the natural gas breakthrough in the United States and elsewhere. Here, the engineers have found no new supplies, but they now offer technologies that allow the practical extraction of gas from shale that previously was inaccessible. The process, called "fracking," will, engineers estimate, enable developers to tap some 48 known shale basins across 32 countries for an additional 170 trillion cubic meters of gas, a 40% increase in global gas reserves.

These are only the most striking supply additions. While these have stolen headlines, less dramatic but nonetheless significant advances in extraction technologies have increased recovery rates of known oil and gas fields, and almost certainly will continue to do so. These can be significant. The 10 years before the great Brazilian find, for instance, saw small finds but increased recoverable oil reserves (largely technologically based) by almost 23%, quite an acceleration from the 8% increase registered during the previous 10 years. The acceleration should continue as the Brazilian find comes on stream. During these same years, recoverable gas reserves, even before the shale became a factor, had increased more than 26%. Advances in oil extraction technology will make reasonable the ambitions of Iraq to top current Saudi sales by 2020. The flow of oil would rise that much faster if Saudi Arabia were to try to keep its export lead with an ambitious upgrading of its extraction facilities. Russia could double its recoverable reserves, without any new finds, simply by applying existing North American extraction technologies to its oil fields, though at the moment no such plans are in place.

Pulling the Threads Together
Taking most of these factors into account, with only a small contribution from the Brazilian find and shale, the IEA anticipates a significant 30% increase in oil and gas supplies over the next 10 years. With a more significant contribution from shale gas technology and Brazilian efforts in the South Atlantic, that supply could easily increase by 40–50% over this time. Since global demand still remains below previous highs, supply has already increased in the interim, and will likely continue to do so, thus it will surely take until 2013–14 at the earliest for demand to approach supply and put any fundamental upward pressure on prices. Of course, fears and speculative flows, as the events of early 2011 have shown, can do much to shift prices regardless of the fundamentals. But at least the basic supply/demand background implies only moderate fuel price pressures at worst.