If the rampaging crude oil price is any guide (crude futures rose again to US$109.09 per barrel last night), the world’s dirty little secret might finally be starting to come true.

The looming spectre of peak oil is fast becoming a reality, courtesy of the perfect storm of declining discovery and a booming China. Even the most bullish of oil commentators will concede that peak oil (which is the point in time where the world begins to consume more oil that it is able to produce) is inevitable – the only real debate is when that will happen.

One of the most well-known ‘peak oil’ proponents is energy sector investment banker, Matthew Simmons. Simmons claimed recently that major oil firms are “actually in liquidation” with the vast reserves claimed largely consisting of expensive, unconventional sources such as Canadian oil sands. It should be noted that while many discredit the notion of peak oil being a reality, Simmons is no crackpot – he served as George W Bush’s energy adviser.

The US encountered peak oil in 1972. Today, the US produces less than two-thirds the daily volume it produced at its peak.

According to the 2006 documentary, Crude Impact, world oil usage is currently around 82 million barrels per day. However, production capacity is only marginally higher, at around 84 million barrels per day. The problem is many fields are past their production peaks – meaning that oil production is actually declining as consumption increases (especially in countries like China and India).

Of the top thirty oil producing countries, fifteen have reached peak oil (including Iran, Kuwait and Russia). Peak oil advocate, Richard Heinberg, author of Powerdown: Options and Actions for a Post-Carbon World, claimed that global oil production capacity needs to increase by 30 million barrels per day by 2010 just to offset depletion – that is before demand increases are even taken into account.

The other problem with peak oil is, like with a recession, we won’t know that it has occurred until after it has happened. By that stage, US$100 a barrel oil will seem like a fairytale.

While high oil prices will reap havoc in the global economy and will inevitably change the way most of West lives, peak oil also raises one of mankind’s most important opportunities. That is, the opportunity to devote real resources to creating renewable energy forms which are commercial in their own right, without the need for generous government subsidies.

At this stage, the alternative energy source which is in the best position to be commercialised on a large scale appears to be solar power. While much maligned for its cost, solar power is slowly becoming a genuine alternative to fossil fuels. According to Fortune, Solar power currently costs around 30 cents per kilowatt hour, more than triple the cost of fossil fuel energy.

However, technological improvements mean that by 2020, the cost of solar power will be significantly less than grid-supplied electricity. The sharemarket certainly believes in the solar story. As Fortune noted, “the market value of the world’s publicly traded solar companies stood at about $1 billion in 2004. Now, after a slew of IPOs, they are worth about $71 billion.”

What effect will peak oil have on us? While no-one can know for sure, Reserve Bank board member and former Woolworths CEO, Roger Corbett has a few ideas. Corbett claimed last week that energy prices may go up by a factor of ten.

Unless a viable alternative to oil is made commercial soon, probably time to rethink buying that Hummer.