Oil is formed through a series of chance events, each of which is essential to the process. A body of water develops a circulation pattern that traps and preserves plant and animal matter containing phosphates and nitrates in an oxygen-deprived layer of sediment. This carbon-rich layer is gradually covered with other layers until it's 7,500 to 15,000 feet deep and above 175 degrees Fahrenheit. Heat and pressure cause complex molecules to break down into simpler forms. Molecules with 5 to 20 carbon atoms become liquid crude oil, while those with fewer than 5 carbon atoms are gases at room temperature and pressure, that is, natural gas.

Because oil is lighter than water, once created, it tends to drift upward. More than 90 percent makes it all the way and seeps through porous rock to the surface, where bacteria and the elements break it down. The other 10 percent or so bumps up against nonporous "cap" rocks and is trapped. And there it waits, diffused in sandstone or limestone, to be liberated by an act of nature or a drilling rig.

Lately, we've been liberating it with a vengeance. After the first big find-generally credited to Texan Edwin Drake in 1859-explorers discovered fields ranging from tiny to "supergiant" all over the world, with clusters in Texas, the Middle East, and a few other places. Early on, there was so much oil and so few uses for it that the United States limited the amount of oil its wells were allowed to produce. Even after the automobile age began in earnest, it was commonly believed that oil existed in virtually unlimited quantities. The supply shocks of the 1970s were shrugged off as political and logistical rather than fundamental, and as recently as the mid-1990s, a barrel of West Texas crude could be had for $20.

To understand how glut became shortage, let's begin with how oil is extracted. Early in the life of a large oil field, when the oil is close to the surface and under intense pressure, it is possible to simply drill down into a reservoir and allow the oil to flow up. But as a field ages, pressure decreases and oil flow declines. Drillers respond by pumping water into the rocks around the deposit. The water flows through the rock and raises the pressure on the oil sufficiently to allow it to keep flowing upward. Today's drillers also employ advanced drills that branch off at angles underground like multi-pronged straws in order to access more of a deposit. This combination of water injection and sophisticated drilling technology allows more-though still not all-of the oil in a given field to be extracted, lengthening the productive life of existing reserves. But no technology can extract oil that's not there, and sooner or later every great oil field, region, and country sees its production decline.

Read about Hubbert's Peak to understand more about the challenges the oil industry faces.