Have you heard about Peak Oil yet? The idea--that the world is maxing out on its ability to produce oil and will soon be faced with a dwindling supply--is capturing the popular imagination. The Peak Oil concept is now being discussed in academic circles, in books and in cover articles for reputable magazines such as National Geographic and The New York Times Magazine. The recent devastation of oil facilities along the Gulf Coast by Hurricane Katrina (and the accompanying spike in energy prices) has added urgency to the conversation. When the final tally is in, how much oil will we have lost? Is it possible for the world to be running out? Will we never see $2-a-gallon gas again? Dwindling oil reserves could change almost everything about the material way people live on this planet.

For all its importance, Peak Oil has not yet been widely discussed in this country, even though oil is the lifeblood of our economy (and the world's). That means you have little to no guidance for interpreting how it might effect the projections you use to plan for your clients, who could face dramatically rising fuel costs in their lifetimes.

Diminishing oil supplies could be considered a variable that, like inflation, should be part of a judicious financial plan. A client's choice of where to live, whether and how to commute and what kind of housing to own could all potentially be affected by the economic effects of scarce fuel. Peak Oil is a complex and controversial topic, and this article is designed mainly as an introduction. If you prepare your clients for the possibility of Peak Oil, they can choose whether and how to respond.

WHAT DO YOU MEAN, NO MORE OIL?

Most people believe that the amount of oil in the world is finite, and that we've found most of it. No huge fields have been discovered since the North Sea in the 1970s, and the world's annual production has exceeded annual discoveries for more than 25 years. On a cumulative basis, we have pumped almost 1 trillion barrels of oil, and estimates of the earth's total recoverable oil are about 2 trillion barrels or a little more. This would suggest that we could be close to Peak Oil now. If the world's total supply of oil is 3 trillion barrels, then peaking would occur when we've produced about 1.5 trillion barrels, or in another five or six years.

At the same time that some geologists and petroleum experts are warning that oil-production capacity may be topping out, world demand for oil is increasing at a rate between 1.5% and 3% per year. Right now, the world pumps about 84 million barrels of oil a day, or more than 30 billion barrels a year.

It's useful to understand how people get oil out of the ground. Many of us have a mental image that oil wells are like gas stations, sitting above caverns (or tanks) filled with oil that can simply be pumped out at will. In fact, oil deposits (which may include gas and sometimes water) usually fill the tiny holes in sandstone or other rock. Once the initial pressure is released (think of the gushers in the old movies), pumping begins at a rate that matches the flow of oil toward the well. As the flow slows, additional techniques can push additional oil toward the well, or horizontal drilling can expose more rock to the intake pipe. Each barrel of oil is a little harder or more expensive to get and some of the oil can't be recovered at all. Pumping too fast or neglecting proper maintenance can accelerate output in the short run, but at a steep cost in ultimate recovery. (It is feared that lack of proper maintenance in Iraq's oil fields will make much of that country's reserves lost to future production.) Anyone who has tried to drink a Slurpee quickly through a straw knows that you rapidly reach a point where nothing comes out until more energy (heat) is added to your cup. Petroleum energy is much more complex, but the image might be helpful.

With today's technology, it becomes harder and harder to get oil from a deposit once about half its reserves have been tapped. Peak production typically occurs at that halfway point, whether for a well, a field, a country or the whole world. Most oil-producing countries--including the U.S.--have passed their date of peak production. Even Indonesia, a member of the Organization of Petroleum Exporting Countries (OPEC), is a net importer of oil now. The only supplier of conventional oil that claims excess capacity these days is Saudi Arabia, and at some point that country, too, will reach its peak. Alternative sources for oil (such as deep-water wells) may eventually come on line, but they do not appear to be plentiful enough to offset the decline in conventional reserves.