A lot has happened to the global oil industry in recent months. First it is important to understand that the concept of “peak oil,” the time when global oil production starts to decline, is alive and well despite the current, and very temporary oil glut. Conventional oil, the kind that comes shooting out of wells at thousands of barrels per day, stopped growing about ten years back. However, non-conventional oil (fracked shale, tar sands, deep water) is increasing. These very expensive “oils” gave many the illusion that all was well despite the steep climb in oil prices, which had to be on the order of $100 a barrel or more before they made economic sense to produce.

The technology of horizontal oil drilling and fracking, which had been known for many years, only played a part in the shale oil “miracle.” It took lots of money to get shale oil out of the ground and a selling price of less than $70 or $80 a barrel was not enough to make it happen. Only China’s rapid economic growth and ability to pay high prices forced them to unprecedented levels. Moreover, the Federal Reserve and its very low interest rates made the shale oil revolution possible by permitting the drilling of unprofitable shale oil wells using cheap money. Note that most of the shale oil under is under North Dakota and south Texas, where the local landowners and governments don’t mind letting drillers tear up the roads and countryside for lucrative fees and taxes.

Last summer, however, the bonanza came to an end: too much shale oil was being produced; the Chinese and other Asian economies slowed their demand; Europe ground to a halt; a glut developed and high oil prices were over — at least for a while. Starting in June of last year and continuing into January, oil prices fell steeply until oil was going for some $40 or $50 a barrel and less in North Dakota where getting oil to markets is difficult. Now these prices were OK for those selling oil from oil wells that only cost $10 or $20 to extract, but for the shale oil, tar sands, and even new deep water drilling projects, prices around $50 or $60 a barrel are a disaster. It takes oil well over $100 a barrel to justify new drilling for unconventional oil.

Currently the world is waiting to see if prices fall back to $40 or $50 as the supply continues to outpace demand and nobody seems willing to cut production. The massive losses most shale oil and other non-conventional producers are facing have resulted in a major cutback in the drilling of new wells and other energy production facilities. Within six months to a year these cutbacks in investment in new production will clearly result in a decline in global production of oil, which may not be possible to recover from. We just may be seeing the arrival of peak oil – conventional and unconventional – sooner than most believe.

Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.