Financial planning for both individuals and countries is critical to seeing the sustainability of our future. One of the most relevant aspects for financial planning is to consider the socio-economic environment and disruptive events. One of the disruptive events that has moved the world economy is the price of oil. That is why today we will talk about Hubbert’s Peak Oil theory and its implication in the world economy and global finance.
Why is Hubbert’s Peak Oil Theory so important?
Hubbert’s peak theory relates directly to the price of oil and how that will affect society at large. Let us remember that oil is the main source of energy and raw materials in the world. This implies that peak oil production will mark the beginning of an era of global economic decline.
The Hubbert Peak Oil Theory is a mathematical model proposed by American geophysicist Marion King Hubbert in 1956. Hubbert’s Peak theory attempts to describe the rate of production of non-renewable natural resources, such as oil, over time. This theory suggests that the production of oil, or any other non-renewable resource, follows a bell-shaped curve.
This implies that whatever the non-renewable resource will have a maximum and there the decline will begin, but let’s analyze a little more the fundamental elements of his theory.
Key Points of Hubbert’s Peak Oil Theory:
- Bell-Shaped Production Curve: The theory predicts that oil production in a given area will begin to increase until it reaches a maximum peak. After reaching the peak, oil production will begin to decline, due to the depletion of economically extractable oil reserves. However, we know that technology can extend what are called “economically extractable reserves” when the cost of extraction decreases.
- Peak Oil Production: The “peak oil” is the point at which oil production reaches its maximum level. Then production will begin to decline, according to Hubbert. This would lead to a significant decrease in oil supply and an increase in prices.
- Hubbert’s predictions: Hubbert predicted that peak oil production in the United States would peak around 1970. His prediction proved surprisingly accurate. Oil production in the U.S. effectively peaked in 1971. However, fracking later managed to increase sources of unconventional oil
- Global Applications: The theory has been applied to global oil production. Some proponents argue that the world has already reached or is close to reaching its peak oil production.
All this, according to analysts, has and will have significant implications for the global economy and energy security. However, there are some objections to Hubbert’s Peak Oil Theory as we will see below.
Criticisms of Hubbert’s Peak Oil Theory
Hubbert’s Peak Oil Theory has been the subject of much debate regarding its hypotheses.
Critics argue that technological innovation can significantly affect the production bell curve.
Examples include hydraulic fracturing and deep-water exploration, which allows the predicted limits to be overextended. In this way, the technology helps to discover new reserves and increase production beyond predictions.
Proponents of the peak oil theory argue that while these technologies can delay peaking, they can’t prevent it indefinitely.
However, the substitution of energy sources through disruptive technologies can change the resource on which society depends. With this, the production peak is completely modified.
Importance and Current Relevance
Hubbert’s Peak Oil Theory has influenced the way government’s view oil production and energy planning.
The accuracy of Hubbert’s original model has been questioned. However, the central idea that non-renewable resources have production limits is relevant. This idea remains at the center of debates on sustainability and the future of energy.
Today, the discussion of peak oil is also intertwined with climate change and the transition to renewable energy sources, adding another layer of complexity to the global energy landscape.
From this approach, let’s analyze how this affects both personal and global finances.
The price of oil and finance
While it is true that the peak theory is quite unpredictable, it tells us about foreseeable events that have a significant impact on the economic foundations of people and society.
Considering these catastrophic scenarios as a possible reality makes us foresee possible risks. With this, our risk management becomes a necessity and not just an alternative.
Many people live with their personal finances on the edge, without considering unforeseen events. A person, company or government with a strategic eye on the threats of the environment may be able to better manage risk.
Some analysts believe that the current global inflationary crisis is related to the peak of oil production. The war between Russia and Ukraine and oil prices play a central role in the current crisis.
The oil shortages generated by the Russian-Ukrainian war and the high prices as a result are affecting the world. Although we have not seen the peak of oil production, this war shows us its possible effects.
Therefore, considering extreme situations in long-term planning is essential to mitigate the underlying risks.
How to mitigate the risks of Peak Oil Production?
Look for ways to make food and industrial production less dependent on fossil fuels. Also consider petroleum-based fertilizers. In this way we ensure food safety.
For Gustavo Mirabal, the Venezuelan financial advisor, we must progressively replace means of transport dependent on fossil fuels to guarantee mobility.
Progressively replace fossil fuel-dependent means of transport to ensure mobility.
Encourage more sustainable consumption patterns in the population in the face of the decline of oil.
To create an awareness of the importance of personal savings to meet the ups and downs of the world economy.