PEAK Oil, the invention of a retired oil industry executive, has for years now fuelled a healthy conference circuit and at the same time played havoc with the oil markets. A simple enough doctrine, it states that Peak Oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.

The theory is a global application of an original piece of work from the 1950s. This original theory was developed in the US and gave a date for maximum US oil output as lying somewhere between 1965 and 1970. Since then it has been all downhill.

Applying this to the global industry, we are told, will give us a date of maximum output which lies somewhere around 2008 -- we are currently experiencing it and are about to enter a period of terminal decline.

That much is fine. The problem emerges with the application of the theory to the markets. By creating a climate of hysteria speculators have been allowed to drive prices up wildly. It could even be argued that the oil market has become dysfunctional. It used to be that speculators brought not just liquidity but also useful information as they placed bets on whether a commodity would rise or fall in value.

But that would appear to no longer be the case. While oil prices still react to short-term events such as the weather, terror strikes and refinery outages, the overall pattern has been an inexorable climb in crude prices, a climb which has become detached from the simple supply and demand economics which used to dictate the price. Today it is all about speculation and the speculators would have us believe that we are about to run short of oil any day now. The result is that the prophecies from the likes of Goldman Sachs have proven unerringly accurate. First it was $100, then $150, now we are told $200 is the new peak to aim for. This at a time when consumption is falling and reserves growing.

Something is wrong and it might just be that Peak Oil is the culprit. Take, for instance, the claim that the theory correctly forecast the 1965-70 'peak' in US oil output. This may well be true, but it proved correct only because of political intervention -- the US slapped a ban on exploration over wide swathes of sensitive territory and at the same time put limits on what could be produced from existing fields, part of its bid to establish a strategic reserve of home-produced oil. Little wonder then that oil output peaked when it did. Left to its own devices, the peak in US output would have been markedly different.

Politics

If this is true of the US, then it is easy to see how it could be true for the global peak in output. Politics has always played a big role in shaping the fortunes of the oil industry and we need look no further than the Middle East to see it at work today.

Politics apart, there are many reasons for ignoring the Peak Oil theory.

Energy efficiency is finally making inroads into wasteful consumption, the huge oil and gas reserves of the former Soviet Union are finally starting to benefit from western oil field technology and management. Oil fields which had been crippled and damaged by reckless production methods are delivering enough oil and gas not just to satisfy the demand from the former Soviet states, but are rivalling OPEC as a source to meet the voracious appetite of the global market.

There is more. The Russian experience is about to be repeated in Iraq, a country which any oil industry expert will tell you holds vast untapped reserves. Apart from the huge fields which have already been identified, there are huge swathes of territory which remain under-explored and hold the potential to throw up enormous reserves.

The small Irish oil explorer Petrel was one of the first to realise the potential in Iraq. According to its chief executive David Horgan, it has vast quantities of quality oil, which crucially can be extracted at low cost. "Reserves in Iraq are estimated at 115 billion barrels but informed observers expect this figure to rise to 300 billion with exploration -- a figure which matches Saudi reserves, the world's biggest," he says.

"It would be stating the obvious that Iraq presents a challenging environment. The country is capable of producing 10 million barrels of oil a day, enough to make a significant impact on the projected deficit in world supply, yet it is struggling to get back to pre-invasion levels of output."

As Horgan explains, the reason for this has nothing to do with the state of the oil industry. Like so many problems, the real cause can be traced back to politics.

"The reason is partially the ongoing security situation, partially the time taken to rebuild Ministry of Oil staff, but, overwhelmingly, the cause is ongoing protracted political negotiations to gain control of perceived and real oil wealth."

Ironically the high oil price is complicating the picture and has led to overblown expectations in the country. As the Petrel chief explains: "High oil prices are only adding to the problem of agreeing an oil strategy. Iraqis see the positions taken by their Arab brethren in surrounding countries, listen to the rhetoric of oil leaders such as Hugo Chavez and want their leaders to be just as tough.

"There is a huge difference between expectation and reality," he says.

In the short term, it is unlikely that Iraq will contribute to an easing in oil prices and it may be some time before the country contributes anything like the 10 million barrels a day which Horgan believes possible.

Iraq remains a war zone and oil companies are reluctant to get involved. Until this situation is resolved there will be little or no oil development in Iraq, he says.

While it is not a war zone, much the same applies to Iran, which could also benefit hugely from western technology and expertise it currently lacks.

Of course politics is at work here as well. Iran currently suffers from poor political relations with the US and EU over its nuclear ambitions, and continued US and UN sanctions have forced up the cost of project developments.

Global Insight's Middle East energy analyst Samuel Ciszuc described the strategy of international firms working in Iran as: "Procrastination and stalling -- whereby the companies have continued to study and plan for the projects without committing any sizeable ventures.

"Iran desperately lacks the required technology and know-how which, as yet, only the oil majors tend to have."

Big oil companies such as Shell have tried to engage with the Iranian oil industry, but with limited success. Only last month it emerged that Shell was considering ending its involvement in a major liquefied natural gas (LNG) project in the country, with reports that Shell and its partner Repsol are devising exit strategies from the $10bn LNG scheme at the offshore South Pars field.

This is a big project and would give Shell, not to mention its customers in the west, access to huge reserves of energy. The US Energy Information Administration estimates Iran's natural gas reserves exceed 974 trillion cubic feet, the second largest proved reserve in the world, after Russia. To put that in context, it is about 100 times bigger than the huge Groningen gas field in Holland, a field which continues too pump gas after more than 50 years in production.

Then there is Saudi itself, where the giant Ghawar field -- reservoir for a quarter of the planet's known oil reserves -- is crying out for the type of investment which can extend its life and boost its production levels for decades to come.

Outside of the Middle East there are completely new oil provinces opening up. Irish firm Tullow Oil is blazing a trail in Africa, long neglected by the exploration industry. In South America the industry is also on the move; last year the biggest single oil find in a decade was discovered off the Brazil coast.

Even in North America there are massive oil reserves which have never been developed and earlier this year the US Geological Survey (USGS) released a long awaited report on the massive Bakken field which straddles the states of Montana, North Dakota and into southeastern Saskatchewan. The amount of oil in place has been estimated between 271 billion and 503 billion barrels of oil. This is a sizeable amount of oil. For instance the BP 2008 Statistical Review of World Energy shows that the four biggest OPEC countries have around 618 billion barrels of oil between them -- that is roughly half the world's 'known' oil reserves, an estimate which incidentally does not include the Bakken reserves.

While oil like this may be difficult to extract, technology will ultimately see fields like Bakken yield up their reserves and make the current estimates for global oil reserves redundant.

Advanced technology is already being applied to old oil fields around the globe, in the process extending by several years the production life of major oil fields.

Then there are the vast reserves contained in oil shales and tar sands, much of it in North America. These reserves have barely been touched and have formed little or no part of the Peak Oil debate.

Exploration too has benefited from developments in technology. This has taken the search for oil into very deep waters with notable successes such as those off Brazil. Even the Irish offshore sector looks set to benefit, with Shell currently drilling the deepest well ever attempted here. Using the world's biggest drill rig, the Leiv Eiriksson semi-submersible, Shell is drilling on the West Dooish prospect almost 2,100 miles off the northwest coast of Donegal, in a water depth of more than 1,700 metres (5,576ft). Drilling on the 12/2-2 West Dooish well started on May 15 and was expected to take up to three months and cost in the region of $100m -- the rig alone costs $1m a day to hire.

Of course this may prove that oil is indeed becoming a scarce commodity, but it also points to the great potential for untapped reserves which still exists.

Given this, then why has the concept of Peak Oil taken such a grip? The answer, according oil industry consultant Paul Kenny, is that it is in the interest of the oil majors, OPEC and any other producing country, to perpetuate the myth.

"The vested interests represented by big oil, OPEC and other producing countries are benefiting hugely from inflated oil prices."

He predicts that people will switch demand to other energy sources "long before conventional oil runs out".

As the former Saudi Energy Minister Sheikh Zaki Yamani said: "The Stone Age did not end for lack of stones, and the Oil Age will not end for lack of oil."

- Pat Boyle