The Peak oil Theory
Peak oil is simply the theory that at some point the production of oil will peak and from that point onwards the amount of oil being produced will decline. Nobody can say whether or not we have seen a peak in world oil production or when that will occur. One of the weaknesses of the theory is that it can only tell when production has peaked after the fact. Obviously there are going to be some very serious consequences when oil production does peak. The biggest is that oil prices will rise dramatically. Peak oil does not mean that we are about to run out of oil, although obviously we will at some point. It is generally believed that even after oil production peaks we will still have enough to last more than a hundred years.
One of the consequences of peak oil is that prices are going to rise; this is the basic economics of supply and demand. The price will also go up because we will be increasingly using oil that is hard to get at. As oil production declines it will start to make economic sense to increase production of things like oil sands or oil that is at the bottom of the ocean. Getting oil out of these sources is quite expensive and only makes sense if prices stay high. Once we are committed to using the more expensive oil it is unlikely that prices will ever go back down.
High oil prices represent a problem for a lot of people. In most countries the entire economy is based on the idea that cheap oil will be available. The main reason that we have used oil as a fuel source for so long rather than find an alternative is that oil has been much cheaper than any other fuel supply. When this is no longer the case it is going to have a dramatic effect on the world economy. Since the price of oil affects the price of so many other things peak oil will likely lead to a period of high inflation. There is also a risk that some countries may not be able to adapt to the new realities of high oil prices. Those countries that can't adapt will be left behind and see their economies really suffer.
Not everybody believes that peak oil is necessarily a bad thing. High oil prices will encourage the development of alternative fuel technologies. Right now the main thing that is holding back most alternative fuels is that they can't compete with oil when it comes to cost. Most people would like to see these new technologies developed since they are far better for the environment. However when all is said and done alternative fuels have to be able to compete when it comes to cost. The high oil prices predicted by peak oil make this far more likely to occur.