It's not hard to understand the change. As the 1990s came to a close, the world was awash in oil. Oil company executives counted themselves lucky to get 10 bucks for a barrel of crude oil, and analysts were predicting that even this price might be cut in half. Forever. When former oil executive Colin Campbell, the dean of the peak oil doomsayers, warned that the end of cheap oil was only a few years away, he was easy to dismiss. After all, hadn't he said the same thing five years before? And five years before that?

More generally, we could consider the consistently dismal track record of other resource pessimists. Didn't professional doomsayer Paul Ehrlich make a bet with economist Julian Simon in 1980 that the prices of five different metals would rise over the next decade? And wasn't he forced to pay off Simon in 1990 as steadily increasing supplies combined with more efficient manufacturing techniques had cut prices in half? Yes and yes.

Today, though, things look very different. Royal Dutch Shell shocked investors last year when it unexpectedly announced that it was slashing its estimate of proven reserves by 20 percent. The price of oil has climbed dramatically since 9/11, passing $50 per barrel for the first time since the Ayatollah Khomeini touched off the world's last oil shock in 1979. At the same time, the demand for oil continues to rise inexorably, fueled by ever bigger SUVs in the United States and steadily growing appetites for Western standards of living in China and India. More than a few mainstream analysts believe that oil prices could hit $100 per barrel in the next several years.

None of this comes because we're literally running out of oil. Everyone agrees that there's still plenty left. Rather, the theory of peak oil derives from a simpler but less widely understood question: How fast can the stuff be pumped out of the ground? Right now, the world consumes oil at the rate of about 84 million barrels per day (bpd), and that's the number which matters. If the world's oil suppliers can continue to increase this production rate as demand grows, the global economy is in good shape. If they can't, we're in trouble no matter how many barrels of crude oil are lying under the ground.

Concern with production rates is neither new nor especially controversial. In fact, it was first raised by M. King Hubbert, a Shell Oil geophysicist, over 50 years ago. In a now-famous paper written in 1956, Hubbert suggested that production rates for oil (and other fossil fuels) follow a bell curve: In new fields, clean, highly pressurized oil flows abundantly to the surface, and as new wells are drilled, production rates rise steadily. After about half the oil has been extracted, however, production rates start to go down. There's still oil left, but declining pressure, exhaustion of the best oil pockets, and increasing contamination bring it to the surface ever more slowly. Applying this production model to the entire United States, taking into account the rate at which new fields were being discovered, Hubbert predicted that oil production in the lower 48 states would peak around 1970 and then start declining.

Hubbert was roundly ignored at the time, but in fact oil production in the continental United States peaked in 1970, right around when he said it would. Thanks to new extraction technologies introduced since Hubbert's original paper was written, production has declined more gradually since 1970 than predicted, but it's declined nonetheless. Thirty-five years ago, the continental United States produced 9.4 million bpd of crude; today, it produces only about 4.7 million.

Nor is this phenomenon unique to the continental United States; most oil fields peak and decline in the same way. Prudhoe Bay peaked in 1989. The North Sea peaked in 1999. China's massive Daqing field probably peaked a year or two ago. They're all still producing oil, but they produce less and less every year.

No less an authority than that legendary curmudgeon-cum-oil magnate T. Boone Pickens thinks this is clear evidence that world oil production has already peaked. “Global oil [production] is 84 million barrels [per day],” he told a conference of alternative-fuel advocates in May. “I don't believe you can get it any more than 84 million barrels. I don't care what Abdullah, Putin, or anybody else says about oil reserves or production. I think they are on decline in the biggest oil fields in the world today, and I know what it's like once you turn the corner and start declining. It's a treadmill that you just can't keep up with.”

Pickens's view is typically colorful, but it's not shared by everyone. Hard data is surprisingly rare in the oil industry, and production forecasts range all over the map, but if forced at gunpoint to provide a firm answer, most mainstream analysts would probably hazard a guess that oil production will peak in 10 or 15 years at around 100 million bpd. The problem is that when such forecasts are broken down, they start to look decidedly shaky. Where are we going to come up with 16 million bpd of new production?

To begin with, oil is found only in certain specific types of geological formations, and we already know where they all are. And while it's true that there are still many of these formations left to explore, recent history suggests that most will produce only modest amounts of oil. Of the hot prospects of the '90s, for example, probably only Kazakhstan's fields have lived up to expectations, while fields in the Gulf of Mexico and the Caspian Sea have been disappointments. Despite the marriage of huge amounts of money with the finest available advanced technology, it's likely we've already found most of the world's truly big oil fields. The rate at which new oil is discovered has been dropping steadily for four decades, and there's no good reason to think that's going to suddenly turn around in future decades.

The same is true of other prospects touted for the future. There might be lots of oil in the Arctic or in the deepwater off the coasts of Africa. There are also tar sands in Canada and heavy oil in Venezuela. But even if they pan out, projects like these take years—or decades—to develop, are likely to produce at modest rates, and, in the end, will do little more than replace declines from older fields elsewhere in the world anyway. We're still looking for 16 million bpd of new oil.

For that, we have to look toward the Middle East. But if you dig around in the details, it turns out that prospects there are surprisingly thin as well—except in one place: Saudi Arabia. In fact, widely respected oil projections share a common feature: They assume that Saudi Arabia, which today produces about 10 million bpd of oil, will be able to double its oil production over the next decade or two.

This is the elephant in the room, and it's something that nearly everyone agrees on. If Saudi Arabia can't double its output, there's not much hope that worldwide oil production can increase very much either. In the end, it turns out that everything hinges on Saudi Arabia.

The problem is that projecting the capacity of Saudi oil production is a tough nut. Ever since the Saudis took control of their national oil company, Aramco, from Western oil companies in 1980, a shroud has dropped over every facet of the kingdom's oil industry. The Saudis release no official data on how their aging fields are holding up, or how well their exploration efforts are going, and their published production totals may not be credible, let alone how much they will be producing a decade from now. As with most OPEC members, Saudi claims of proven reserves have increased steadily since 1980, but most analysts agree that these numbers have been manipulated upward for political reasons related to OPEC production quotas and bear little relation to reality. For oil industry experts, Saudi Arabia is a gigantic black hole, a target of guesswork, not analysis.

After 9/11, however, things began to change. Reeling from American revulsion at the discovery that 15 Saudi nationals led by the son of a Saudi billionaire had carried out the attacks, Saudi officials began a charm offensive. In an effort to demonstrate their bona fides as a reliable—and necessary—American ally, the Saudi oil ministry began inviting oil analysts over for tours of its facilities. And although they hardly became models of transparency, they did start releasing more detailed production data than they had in the past.

In retrospect, this effort may someday be viewed as one of the most disastrous PR campaigns in history. Far from reassuring everybody, a closer look at the Saudi oil industry caused some analysts to lose hope altogether. In The End of Oil, published last year, Paul Roberts recounted his visit to Saudi Arabia: “I was standing on a sand dune in Saudi Arabia's 'Empty Quarter,' the vast, rust-red desert where one-quarter of the world's oil is found, when I lost my faith in the modern energy economy.”

Peculiar as it sounds, Roberts's problem wasn't with Saudi Arabia's oil, it was with Saudi Arabia's water. In most large oil fields, including all of Saudi Arabia's, oil is forced to the surface by the natural pressure of the reservoir itself. In order to keep this pressure up as more and more oil is extracted, water is injected back into the reservoir.

This standard part of oil field maintenance still carries a cost: Eventually the injected water seeps into the oil itself, and the stuff that makes it to the surface becomes increasingly contaminated. That's perfectly normal, but what prompted Roberts's dismay was the discovery that at Saudi Arabia's Ghawar field, the biggest oil field in the world, the percentage of water mixed in with the oil is now 30 percent. That's a dangerously high level.

Another analyst who made the post-9/11 pilgrimage to Saudi Arabia was Matthew Simmons, an advisor to Dick Cheney's energy task force and a one time contributor to George Bush's energy plan during the 2000 campaign. An investment banker who has specialized in the energy industry for 30 years, Simmons visited Saudi Arabia for six days in 2003 as part of a U.S. energy delegation and, like Roberts, came away skeptical. Could Saudi Arabia really double its production rate over the next decade? For that matter, could it increase its production rate at all? Or had Saudi production already peaked?

His interest piqued, Simmons turned to perhaps the most honest available resource about Saudi Arabia's oil industry: The over 200 technical papers written since 1961 by Aramco (and then Saudi Aramco) engineers and managers and published by the Society of Petroleum Engineers in Richardson, Texas. Simmons admits that this is a very small keyhole through which to peer in order to estimate the true state of the Saudi oil industry, sort of like trying to decode Linear B from only a couple of slabs. Still, he is convinced that the reports, especially the more recent ones on which he primarily relied, present a consistently disturbing picture. The result of hisanalysis is Twilight in the Desert, whose title summarizes his conclusion: He thinks Saudi oil production—and therefore world oil production—is in a lot more trouble than anyone is letting on.

Once again, water is at the core of the critique. Of Saudi Arabia's 10 million bpd of oil, about 90 percent comes from a mere seven giant fields, all of them old. Ghawar, a uniquely gigantic field which all by itself accounts for more than half of Saudi Arabia's output, has been in production since 1951. A massive water injection program was begun in the early '60s, and today more than 7 million barrels of seawater are required daily to keep Ghawar going. Even at that, though, the best evidence indicates that Ghawar's production may have already begun declining.

Simmons presents a considerable amount of engineering evidence to back up his contention that Ghawar's best days are drawing to a close—and then, just as the lay reader is ready to scream for mercy, does the same in minute detail for Saudi Arabia's other major fields. In fact, Twilight in the Desert is more monograph than book, a detailed and technical assessment that's heavy on references to permeability (delightfully measured in millidarcies), the Arab D geological formation, rock homogeneity, oil-water contact planes (Ghawar's being mysteriously tilted), reservoir fractures, and more.

Fundamentally, though, Simmons's argument can be broken into two parts. The first and most detailed is a contention that Saudi Arabia's mainstay oil fields may have already passed their production peaks and are unlikely to ever supply more oil than they produce right now.

The standard response to this argument is that new technologies are allowing us to extract ever increasing ratios of oil from aging fields, but, in a clever bit of rhetorical jujitsu, Simmons stands this argument on its head. Saudi Aramco, he writes, is already using the most sophisticated technology in the world. Vertical wells are less and less common, replaced years ago by more efficient horizontal wells and more recently by even more efficient Maximum Reservoir Contact wells designed to suck the last possible drop out of aging oil pockets. Geosteering, 3-D seismic imaging, and increasing use of downhole intelligence are routine. Saudi technicians have a computer complex so sophisticated, they can literally stand in a room wearing special glasses and get a three dimensional view of reservoirs over a mile underground.

In other words, there remains nothing to try. The best technology known to man has already been put to use all over Saudi Arabia in an increasingly desperate attempt merely to keep production steady at 10 million bpd. In the vernacular of the oil industry, Saudi oil fields have been in “secondary recovery” mode for years, and long experience elsewhere in the world has already taught us the limits of the advanced extraction technologies now being used in Saudi Arabia. They can mitigate production declines after a field peaks, but they can't stave off the peak itself. More money and more technology won't bail us out here. We're up against geological limits, not financial ones.

The second part of Simmons's argument concerns exploration for new sources of oil in Saudi Arabia. Contrary to conventional wisdom, which assumes that Saudi Arabia is a vast expanse of desert that has only been lightly explored, Simmons presents considerable evidence to indicate that, in fact, almost every square mile has been mapped with the most sophisticated available modern tools—but with little return. In recent years, only one major field has been discovered outside the Eastern Province (home to all other major Saudi oil fields), and its performance has been problematic. The possibility of finding major new fields outside the Eastern Province looks considerably less promising today than it did a couple of decades ago.

Simmons suggests that the Saudis have tacitly acknowledged this reality in their decision to pour most new investment into seeking to revive old fields instead of drilling in new ones. After all, why would Saudi Aramco expend so much effort on expensive attempts to resuscitate aging fields were there any genuinely promising new fields to exploit instead? Simmons concludes: “Unless some great series of exploration miracles occurs soon, the only certainty about Saudi Arabia's oil future is that once its five or six great oil-fields go into steep decline, there is nothing remotely resembling them to take their place.”

Against Simmons's arguments are two things. First, he has access to extremely limited information. As he admits, he's trying to connect some very faint dots based solely on scattered technical reports and what little public data exist. Second, the Saudis themselves, who do have access to plenty of information, have consistently claimed that they can significantly increase oil production over the medium term—and they've never missed a shipment yet. As the Center for Strategic and International Studies (CSIS) recently put it, Simmons's argument “depends on the Saudi Aramco managers being wrong or covering up massive risks and development problems, and virtually all of the other analysts examining world oil reserves and production potential being wrong about both the size of the world's oil reserves and the ability of modern technology to provide future significant gains in ultimate recovery.”

In other words, Simmons's view is very much a minority one, a fact of which Simmons is well aware. Still, if Saddam Hussein was able to fool the world (and perhaps himself) about Iraqi WMD capabilities, it's equally possible that the Saudis are fooling the world (and perhaps themselves) about their production capacities. Indeed, just as Saddam felt that his power in the region depended on the perception that he possessed WMDs, perhaps the Saudis feel that their world influence depends on their reputation as a source of limitless oil.

Simmons himself avoids such speculations, but in other respects, he seems comfortable in his contrarian role. As the CSIS report implies, he is skeptical that magical new technologies that will allow oil companies to substantially reinvigorate old fields outside Saudi Arabia, and he does believe the Saudis themselves are either lying or in serious denial about their own future capacities—and that the rest of the oil industry has lazily taken their assurances at face value for years instead of investigating them closely. He also implicitly puts the question to his skeptics: If the Saudis are so anxious to soothe the world's fears, why don't they produce the detailed field-by-field reports, test-well analyses, and exploration results that would convince everyone they're telling the truth?

For Simmons, this is no idle question. His main fight these days is to push for increased transparency in the oil industry so that independent analysts can rely on more than guesswork to figure out how much oil we have left. It's a good cause as far as it goes, since the almost complete lack of solid information in the oil patch leads different analysts to wildly diverse conclusions. Peak oil doubters, for example, project a world production peak sometime around mid-century, if ever. They note that production has continued to increase for decades despite warnings of decline ever since the first oil embargo. They point out that estimates of world oil reserves have increased since 1980 despite the fact that we've gulped down more than 500 billion barrels of the stuff during that time. And they argue that higher prices will promote additional exploration and more extensive use of costly technology, while making it profitable to develop otherwise remote deepwater and Arctic oil fields.

But a growing number of analysts view these arguments as Pollyannaish at best and obtuse at worst. Yes, production has risen steadily over the past century, but declining oil fields mean this is unlikely to continue in the future. Claimed reserves have increased, but this is due more to political and statistical finagling than to actual new discoveries. And the slowing rate of big new finds combined with the increasing number of disappointments suggests that we shouldn't count on future mother lodes to bail us out. Saudi Arabia really is our last, best hope. If Simmons is right that Saudi Arabia's oil production has peaked, so has the world's.

Still, even the peak oil ideologues who make these arguments can't agree on how close the peak actually is. Princeton professor Kenneth Deffeyes jokingly pinpoints the peak on Thanksgiving 2005, Colin Campbell's latest prediction puts the date around 2007, and other peak oil supporters suggest dates anywhere between last year and 2015. As Simmons and others admit (or perhaps warn ominously), we won't know for sure that oil production has peaked until a year or two after it happens.

Even if the doomsayers are right, solutions are hard to agree on. Market forces will certainly solve part of the problem. As prices increase, demand for oil will level out and production will—for a while—increase slightly as it becomes profitable to drill in marginal fields that are currently lying fallow. But this obscures the fact that high prices, as bad as they are for an economy addicted to cheap oil, aren't the worst prospect facing us. The real problem is spare capacity.

Spare capacity is not the same as the possibility of future discovery, which is necessarily speculative and, in any case, won't be on line for years, if ever. Rather, it's pumping capacity that is currently unused but can be turned on immediately if needed in a crisis. Saudi Arabia, for example, was able to open the taps on its wells practically overnight during the 1979 Iranian crisis, and then again in 1991 during the first Gulf War. If that immediate spare capacity hadn't been available, oil prices wouldn't have just spiked, they would have skyrocketed.

But those days are gone. Twenty years ago, OPEC had spare production capacity of about 15 million bpd. A decade ago that had dropped to 5.5 million bpd. By 1990, spare capacity has dropped almost to zero. What this means is that arguments over the exact timing of peak oil are increasingly academic. No matter who's right, what we can say with some certainty is that even if oil production continues to grow, it will grow slowly, which means that supply will barely keep up with rising demand.

In other words, it's likely that we're now in a permanent state of near zero spare capacity, which in turn will lead to an increasingly unstable world. As we enter an era in which even Saudi Arabia has no spare capacity to smooth out supply disruptions elsewhere in the world, any blip in supply, whether from political unrest, terrorism, or merely unforeseen natural events, will cause prices to carom wildly. A world with $100 per barrel oil is bad enough, but a world in which a single pipeline meltdown could cause prices to skyrocket to $300 per barrel for a few months and then back down is far worse.

What to do? Any serious policy solution has to be based on four fundamental pillars: increased production, development of alternative fuels, conservation, and increased efficiency. And because these are all very long lead items, the time to start is now. After all, if the peak oil theorists are right, we have only a few years left until oil production peaks and then starts to decline. But even if they're wrong, the peak is still only 10 or 20 years down the road—and instability induced by spare capacity is a looming problem regardless.

So, why hasn't anyone in either party seriously acknowledged the reality of peak oil? It's not because they don't know about it. George Bush is a former oil man, after all. “He tells me to keep speaking out loudly and honestly about our energy situation,” Simmons informed a reporter who asked what Bush thought of his recent peak oil warnings, but the all too obvious follow-up—does Bush believe he should do anything about it?—was left hanging.

Unfortunately, the answer is all too easy to guess. Among Bush and his Republican allies, energy policy is almost entirely focused on one thing: opening up the Arctic National Wildlife Refuge to drilling. And while acknowledging peak oil might help with that fight, it would also open up a Pandora's box of issues Republicans are desperate to avoid. Conservative orthodoxy on taxes prevents any serious discussion of conservation measures like increased gas taxes, and Republican friendliness to business interests prevents consideration of stronger gas mileage standards for SUVs or federal standards for energy-friendly building codes. Bush and other Republican leaders pay lip service to development of alternative fuels, but serious funding is nowhere to be seen. The energy plan currently on offer from the White House is derided by practically everyone on both right and left as little more than a transparent set of payoffs to Bush administration cronies.

Democrats have their own set of problems. Opposition to drilling in ANWR is almost religious despite the fact that environmental damage to the Arctic wilderness would probably be modest. Increased mileage standards have more support, but auto union opposition keeps them on the back burner. Looming over all these specific policy proposals, however, is an even bigger fear: being tagged as an energy Cassandra. Call it Jimmy Carter-itis: No one wants to follow in the footsteps of the man who wore cardigan sweaters on TV and warned about an era of limits—and turned out to be wrong. Democrats paid for that with 12 years of political exile.

All of which is bad news. Even if we prepare ourselves for the peaking of oil production with a sensible, broad-based energy plan, we'll still be faced with the pain of prices marching relentlessly higher for years to come in order to match demand to steadily diminishing supplies. If we're not prepared, though, the bad news of peak oil becomes potentially catastrophic: An oil shock leading to global recession at best and a long string of resource wars at worst. Given the choice between these two bad alternatives, and the long lead time required to implement any kind of serious energy plan, we'd be well advised to get started now.