No, we’re not running out of oil, as some predicted. But petroleum—like some other commodities, including copper—is getting more expensive to find and produce, writes MoneyShow’s Jim Jubak, who also writes for Jubak’s Picks.

Now that oil is a long way from the $145 per barrel peak it hit in July 2008, and nobody on Wall Street is predicting—as Goldman Sachs did in 2008—that oil is headed to $250 a barrel, we’re not hearing much about peak oil anymore.

The peak oil model, initially developed by oil geologist King Hubbert and used to predict a peak in US oil production between 1965 and 1970, says that the production from an oil field grows exponentially over time, then peaks and finally declines. The model has been applied to individual oil fields, national oil industries, and global oil production.

Back in 2008, the fiercest proponents of peak oil as a global model were predicting that the world would start running short of oil sometime around 2020.

Now that the world is awash in oil, the only people talking about peak oil are those who oppose the idea. They are dancing on what they depict as the grave of what they call a "theory" that wasn’t worth the graph paper it was plotted on.

Well, I still think that the peak oil model is a useful description of what we see happening in the oil industry today—even if West Texas Intermediate, the US benchmark, closed at a twitch under $100 a barrel last week. (Brent crude, the European benchmark, closed at $114.58.)

And I’d go on to say that the peak oil model is the best way to understand what’s happening to the prices of other commodities, especially copper.

(Full disclosure: I predicted that oil would go to $180 a barrel shortly before it began its collapse from the $145 a barrel high in 2008. And full, full disclosure: The only one predicting $250 a barrel oil right now is Iran, which is threatening that prices will reach that level if developed economies impose tougher sanctions on the Iranian economy in an attempt to slow or stop that country’s development of a nuclear bomb.)

Why Peak Oil Still Matters
Let me explain why I still find so much value in this "discredited" theory.

The most damage to the peak oil model resulted from the overenthusiasm of its friends during the commodities boom that topped out in 2008. A view that I’ve called "hard peak oil" held that Hubbert’s model had predicted that world oil reserves were about to go into decline, that oil production was about to plunge, and that the world was about to run out of oil.

Those were all extensions—unjustified in my view—on Hubbert’s model. Hubbert’s formulation addressed only production rates and wasn’t a prediction of the measured levels of global oil reserves. Also, Hubbert’s model used a relatively narrow definition of oil, not surprising in an era when the conventional oil production of Texas, California, and Louisiana dominated the US industry.

When oil companies continued to find oil and global reserves and estimates of global reserves continued to climb, peak oil theory took a ding. Then the global oil industry discovered huge, unconventional sources of oil in the Canadian oil sands and the tight shale formations of first the United States, and then Argentina, China, and Europe.

That revived production in mature oil-producing countries, such as the United States, and made the theory look loopy. But to see how useful a peak oil model can be to an investor, look at the latest quarterly results from the big international oil companies.

Spending More to Get Less
Let’s start with Royal Dutch Shell (RDS.A).

Production volumes fell 5% year over year in the fourth quarter. Full-year production was down 3% from 2010. However, Shell told shareholders that it would reverse that downward trend and increase production in the low single digits in 2012.

What interests me is how much money Shell will invest in its attempt to reverse declining production. Shell will increase its total capital investment to $32 billion to $33 billion in 2012, from $31.5 billion. The actual increase in the capital budget for oil exploration, development, and production will go to $24 billion in 2012 from $20 billon in 2011. That’s a 20% increase.

And what will Shell and its investors get for those bucks? If recent history is any guide, not as much as they used to get.

Shell’s return on average capital employed fell to 15.9% in 2011. A few years ago, when oil prices were much lower, this figure checked in above 20%.

Shell has had trouble increasing production in recent years, but the drop in return on average capital employed is an industry-wide problem. For example, Chevron (CVX), one of the international majors that has been most successful at adding reserves in recent years, showed a return on average capital employed 20% lower in 2011 than in 2008.

ExxonMobil (XOM), which is historically more profitable than its peers among the international majors, averaged a return on average capital employed of more than 27% from 2006 through 2010. In 2010, the company’s return on average capital employed fell to what was still an industry-leading 22%.
(ExxonMobil’s big acquisition of XTO Energy in June 2010 makes it tough to compare figures for 2011 with previous years.)

These trends are just about what you’d expect from the peak oil model. As reservoirs mature, oil produced from them gets more expensive, as companies have to invest more in methods to extract oil. As fields and national reserves mature, companies can continue to add new oil discoveries, but the cost of each new discovery is likely to rise.

And I’d add this corollary to Hubbert’s original model: As oil prices rise, oil companies invest in unconventional oil reserves, but producing oil from these unconventional sources—whether from the oil sands of Alberta, the tight shales of Eagle Ford or the deep ocean pre-salt formations off Brazil—is more expensive than producing conventional oil. The world can certainly continue to expand its reserves of oil, but only by increasing its investment in exploration and development.

NEXT: Investing in Peak Oil

Tickers Mentioned: Tickers: RDS.A, CVX, XOM, BHP, SLB