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Peak Oil Demand: Peak Oil Didn’t Go Away, it Just Changed its Name

By Post Carbon | Wed, 25 September 2013 23:57 | 7

A new phrase has entered our energy lexicon—peak oil demand. The essential idea: prophets of doom who warned about a looming global petroleum shortfall (“peak oil”) were wrong; instead of a downturn in supply, we’re instead seeing the shrinkage of demand for oil. A non-problem just solved itself! Nothing to see, folks; move along.

What’s wrong with this framing of our energy situation? Plenty.

To understand what and why, it’s helpful to start with a sense of who’s crooning the “peak demand” tune: it’s long-time peak oil critics like Daniel Yergin—the oil industry spokesman who, throughout the past decade of soaring oil prices, repeatedly assured the public that prices were going to fall back to historic levels (he was wrong each time, see here and here.). The industry hates peak oil, because if people took it seriously there would be a mad rush by individuals and governments to reduce petroleum dependency. Can’t have that.

Is it true that demand for oil has fallen? Yes—and there’s the kernel of truth from which “peak demand” has sprouted. In the older industrial nations—principally, the US, Japan, and Europe—oil consumption started moving sideways-to-downward around the time of the 2008 financial crisis. In fact, if US oil demand had continued its historic upward trend (about 1.5 percent per annum), it would be about 20 percent above the actual current level.

Here’s the all-important question: Why? The peak-demand chorus says, “developed economies are on an efficiency kick.”

Americans are buying hybrid cars and electric vehicles, and manufacturers are engineering traditional gasoline engines to be more fuel-efficient. The average fuel efficiency of new cars in the US is at its highest level ever.

Related article: Where's the Next Play for the Giants of Oil?

Fair enough. But that’s far from being a sufficient explanation for the demand destruction we’re witnessing, given that relatively few Americans are buying new cars these days. In fact, the biggest single component of contraction in US oil demand is drivers clocking fewer miles annually.

US Vehicle Miles

The past five years have seen the longest sustained period of non-growth of vehicle miles travelled (VMT) in US history. Why aren’t people driving more? Two words: gas prices. Incomes for most Americans haven’t improved in recent years, but gasoline prices are hovering near their highest level ever. Driving has gotten so expensive that attitudes toward automobiles are slowly changing, with many young people abandoning the very idea of car ownership.

However you look at the recent decline in petroleum demand, stratospheric oil prices are clearly implicated (it’s not just parsimony in miles driven; efforts to boost fuel efficiency are also largely motivated by gas pump sticker-shock).

But why are petroleum prices so high? Although some commentators are quick to blame oil companies or speculators, the main factor keeping the price of oil above $100 a barrel is supply. Yes, OPEC frequently reminds us that the oil market is “well supplied.” But that claim requires an addendum: the market is well supplied with $100 per barrel oil—which the economy can barely afford. If the oil price were to slip southward, back to historic levels (closer to $40 per barrel, adjusting for inflation), the number of barrels of petroleum available worldwide would quickly dwindle. That’s because the amount of oil that can be produced profitably at a low price (typically from onshore, conventional, vertical wells) has fallen in recent years. All new demand has been met with oil from marginal, expensive sources—tar sands, horizontally drilled and fracked tight oil wells, or deepwater wells. Producers need prices of $100 a barrel to justify investing in these operations. The oil industry has doubled its level of investment in production in recent years, and doubled the number of wells it drills annually, while taking on far more debt—just to grow total oil supply at an anaemic rate.

So the correct framing of our situation is this: Falling production of conventional oil is pushing prices higher, and high prices are driving demand down. “Peak demand” is peak oil by another name—de-fanged and de-clawed.

Euphemisms don’t change reality, except by first changing people’s perceptions of reality, and hence their actions.

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Here’s reality, stripped of niceties. Oil is the lifeblood of industrial society, since nearly all transport fuel is oil-based and transport is essential to trade. Industrial nations have no ready and adequate substitute for petroleum. Therefore, unless preparations are made, the inevitable decline in global conventional petroleum production will gradually strangle the world economy, starting with the most oil-dependent nations.

Production rates of conventional oil will decline more sharply as time goes on, making it harder with each passing year to keep total liquid fuel production steady, harder still to grow it.

As long as prices remain high, increasingly desperate efforts to slake society’s thirst for liquid fuels will lead to the exploitation of more costly substitutes for conventional crude, such as tar sands—but these sources also happen to carry more environmental costs and risks. Problem not solved.

The currently favored “fix” for the dilemma of conventional oil depletion and decline—tight oil from North Dakota and Texas—is in the midst of a short-term boom. But the supply boom won’t last until the end of the current decade, and a demand bust could foreclose this expensive option even sooner.

All the “peak demand” discourse actually accomplishes is to lull society into inaction. Why worry? The market is solving our problems for us. There’s no need to actually do anything—like retool our economy for less mobility, less growth, and more renewable energy.

Peak oil? It’s doing just fine, thanks. As for our oil-dependent economy, not so much.

By. Richard Heinberg

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Post Carbon
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Leave a comment

  • John B. on September 26 2013 said:
    Oil alternatives are cheaper. Transportation, heating, electricity generation. The only advantage oil has is existing infrastructure. And that infrastructure will need to be replaced eventually anyway. Bad news for peeps trying to sell doomer books.
  • Cyrill Landau on September 26 2013 said:
    Richard Heinberg needs to admit that he is always wrong about everything. He is like a prophet advocating rapture.
  • John S. on September 26 2013 said:
    When you compare oil reserves to current demand we're at the highest level we've been since at least 1980 (based on EIA data). Based on the high level of investment we're seeing and slowly increasing global demand this ratio will only continue to increase. Our problem is definitely not supply.

    Or, as you put it, conventional supply. I think you have this backwards. Prices did not rise to current nosebleed levels because of conventional supply problems. Prices rose because we deregulated our commodity markets around the turn of the century and allowed speculators in. The enormous amount of money and leverage brought to these markets pushed prices up. This, in turn, created a market for the non-conventional (oil sands, tight oil, etc.) sources. As the non-conventional sources have become a larger percentage of supply, it appears on the surface that conventional sources are less robust than they really are.

    To be clear, we are awash in oil. Not just that, high oil prices have lead also to enormous investments in alternatives like natural gas, which can replace petroleum in some applications. My buddy in the petro-chemical industry is telling me that high oil prices are literally pricing petroleum out of some traditional applications.

    High oil prices have been strangling the global economy. Our anemic recovery is due to high oil prices, not lingering debt issues. Absent regulators tossing speculators out of our commodity markets, which I don't expect, we'll need to just wait for speculators to tire of this incredibly stupid "investment". Rest assured, it will happen. When it does we'll truly be in a golden economic period.
  • Rich S. on September 28 2013 said:
    A nicely written article, and it captures my perspective exactly on the rationale surrounding the term "peak demand".

    World demand for oil grows every year, and virtually all of that demand growth is being met by unconventional oil.

    Conventional oil production, as publicly stated by the IEA, peaked in 2006.

    Having said that, my best performing investments over the last decade have been in the energy sector - and there is a very obvious reason why (hint: it's NOT due to peak demand).
  • David Hrivnak on September 29 2013 said:
    Richard I really think you hit the nail on the head. Since 1999 the price of oil is up 605%. Well above inflation. And while oil prices are up over 600% production is up less than .5%/year. You are right the high prices are destroying demand but prices are not dropping as cheap oil is on the decline. This is one of the reasons I now drive an EV. I can cover 200 miles on $4 of electricity. Electricity I can generate myself thanks to my new solar array.

    Just try to make your own liquid fuel, now that is a very difficult task.
  • Matt on October 07 2013 said:
    Peak cheap easy to find and extract oil occurred in 2005. Soon economic peak oil will occur where the cost to extract and sell oil will not create economic growth.
  • Ashton Symm on October 09 2013 said:
    The trade deficits of Europe and the U.S account for quite a lot of 'of-set' oil demand. As more plastics and manufactured goods are produced in countries like China for the the U.S and Europe to consume, the end product and therefore oil input should still be attributed to E.U and U.S data. I'm not certain it is.

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