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Dwayne Purvis

Dwayne Purvis

Dwayne Purvis, P.E. is a reservoir engineering and management consultant based in Texas.  Find commentary and free resources at www.dpurvisPE.com. Besides writing and speaking on…

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There Is No Such Thing As Peak Oil Demand

Oil

Notwithstanding that oil demand has increased for over 150 years, it will eventually stop increasing. If oil demand were to reach an actual peak, then the top might be easier to predict. As it stands, the forecast models of demand are likely predicting peak demand far later than it will be.

The so-called balance of supply and demand has always been a moving target, a race to the top in which the two run neck and neck. Imbalances result from out-of-step growth rates and not from movements away from a stationary balance. Perversely, imbalances breed further imbalances as the supply and demand components are provoked in opposite directions but with different timing, magnitudes and inertias. Without sufficient damping, the market has often overcompensated. Of course, there are also exogenous events like political turmoil, policy shifts, technological innovations and demographic changes which can unexpectedly and significantly alter not just the immediate balance but fundamentally shift the way supply and demand curves respond to price movements. The trends are plagued by inherent and irreducible irregularities.

Such a structural change has recently occurred. High prices persisted long enough for the industry in the U.S. to build a larger fleet of modern rigs and to learn how effectively to hydraulically fracture shale wells. It also persisted long enough for new efficiencies to incubate towards maturity, and the Paris accords promised to further reduce carbon emissions through policy changes. By the time that Saudi Arabia finally acted to protect not only its place among suppliers but also, and more importantly, the role of oil in the world economy. The backbone of shale supply in the U.S. was strong, and the seeds of lesser use were established. After these fundamental shifts, the rest of the world realized what Saudi Oil Minister Al-Naimi argued long ago and what Shell Oil has more recently asserted, namely that peak demand will occur long before peak supply. Related: Dakota Access Pipeline Loaded And Ready For Business

To understand the trajectory of demand growth, we turn to econometric models like those published by the EIA and IEA. The central problem with long term supply and demand models is that they require assumptions about the many and interrelated responses to today’s prices. Though modeled responses may be tuned with low precision to relatively recent events and new realities, the actual response curves are poorly constrained and continue to evolve, in some cases at an accelerating pace. As the aphorism goes, all models are wrong, but some are useful.

The EIA, IEA and other public econometric models call for global oil demand to continue growing through 2040, and the EIA even calls for renewed growth in the U.S. and OECD demand. The forecasts of growth in global demand rely upon increased use by developing countries, most importantly China and India. On the other hand, the United States has already seen demand decline for about 13 years. In fact it was the second to last of the world’s seven major developed countries to enter demand decline, and the entire OECD group of countries has, as a whole, seen shrinking demand since 2007. EIA data shows that 35 countries in all have already reached and descended from maximum oil demand. The experience of projected versus actual peak oil demand in the U.S. and OECD countries provides an empirical test and thus context to evaluate the current forecasts of growth and delayed maximum.

The following chart compares actual oil demand in the U.S. to several relevant demand forecasts of the EIA, all data coming from the EIA itself. U.S. demand reached a plateau for four years ending in 2007. Before, during, and even after the actual maximum demand, the models predicted decades of growth.

(Click to enlarge)

The next chart shows the same kind of comparison for the IEA’s models of OECD oil demand. Actual demand gently achieved its maximum in 2005. Even the alternative policy (lower demand) case in 2006 failed to capture the impending decline, but the reference cases adapted to the reality of declining demand much more quickly than did the EIA. Still the IEA over predicted the actual demand. Though not shown in charts, the EIA’s model of OECD demand growth and the IEA’s model of U.S. demand growth follow the same patterns. In short, these deeply technical and widely used referenced models missed badly the pivot point, the watershed of the object of analysis. For truly exculpatory reasons, the second and third order dynamics of reality were not captured by the models.

(Click to enlarge) Related: Oil Companies Bet Big On This Mature Oil Play

Rather than the theoretical calculation by such models, empirical observation of history is likely more informative when it comes to anticipating the timing of maximum demand. The graph below normalizes annual oil demand from the G7 countries with the U.S. shown in black, each normalized to its own year and volume of maximum demand. The scales show a 15 year window around the maximum annual consumption, and the pattern of the G7 is repeated in the OECD total and in most all of the 28 other countries.

(Click to enlarge)

The same data viewed on the scale of generations may resemble an alpine peak, but from the experience of living through it, demand does not peak. It sputters, surges and stalls as it rolls over from a slow incline into a slow decline. It is less a peak and more a crest of demand.

Sequential global demand forecasts over the last decade have projected slower growth, mostly now forecast at less than 1 percent, and sensitivity cases now allow for the possibility of substantial demand decline by 2040. Unfortunately, experience demonstrates that the crest will likely occur unexpectedly and sooner than predicted. And then our industry enters a whole new world as the moving balance of supply and demand turns into a race to the bottom.

By Dwayne Purvis for Oilprice.com

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  • brett ingham on March 28 2017 said:
    The author of this report may be dead-on right about oil consumption regarding OECD countries, but the far bigger issue is the developing countries, especially India and China, where 2 billion people are moving quickly towards the modernized world. That population is nearly 10 times larger than the U. S. Do we expect electric vehicles to outpace demand for gas driven vehicles in those parts of the world more rapidly than the 1% decline in demand for the OECD countries? I know where I would place that bet!
  • Bharath on March 28 2017 said:
    @brett ingham-
    being an indian i will tell you wats happening in india-

    -13 % of total crude oil is used in agriculture mainly for water pumpsets and tractors. of 10 million diesel pupmsets already 1 lak pumpsets r converted to solar pumpsets, its happening so fastly trust me in next 5-10 years no one will use diesel pump sets. My bet is 3-4% crude oil demand will be off in next 3-5 years.

    - 25% of total crude oil is used in public transport vehicles like buses and heavy trucks. Govt is planning to convert 1.5 lak diesel buses into electric buses in next 3-5 years and its already started pilot projects. For heavy trucks and lorries, govt is planning for a electric highway from Delhi-Mumbai but this is still in thought process . my bet is 3-4% crude oil demand will off

    -35% of crude oil is used in mainly 2 wheeler and 4 wheeler vehicles, i still didnt see any major impact on this sector except private taxi services like ola and uber and popular Autos convert from electric from diesel (reason is economics and more profits). but god.. indians are buying 2.5 million diesel/petrol cars so this will increase the oil demand to 2-3 % of oil every year

    Reminaing 27% for other industrial purposes, only this sector will increase the crude oil demand to 1-2% every year.

    My assesment is in next 3-5 years the crude demand will fall to 2% then what it is today.
    And top of that India planning to develop oil fields and i guess india will be importing 3% less oil from outside world
  • Bill Simpson on March 29 2017 said:
    The price of oil based fuels will have to go up quite a bit to make battery powered transport cheaper than oil based fuels.
    And people have to be rich enough to purchase expensive battery powered cars.
    The developing world contains billions of people who would just LOVE their own car or truck. As they get richer, many will try to buy one. That will increase the demand for gasoline and diesel.
    Jet travel will continue to increase, as the poor countries gradually get richer. Cruise ships are increasing. They consume vast quantities of oil. Oil is used for thousands of plastics and for paving roads. The chemical industry uses some oil and a lot of natural gas. Should reusable rockets prove feasible in lowering the cost of space access a lot, rockets could consume a lot of kerosene. Some will be fueled by methane from natural gas, but many might burn kerosene in the first stage, due to its high energy content. It won't take thousands of rockets to consume a lot of kerosene, since getting to orbit requires a lot of energy.
    I would be shocked if the global demand for oil peaks within the next 30 years, unless some new source of cheaper energy, like possibly nuclear fusion, is invented. Worrying about having too much oil is like worrying about having too much gold. Maybe that is one reason why they call it, 'black gold'.
  • Josh Gregner on March 29 2017 said:
    The key difference between today and the past decades is, that we have alternatives to oil now. They may not have arrived in every single country just yet, and they may take a year or two to unfold but I think it is clear that the move off oil and coal is inevitable.

    The old way of thinking is: "rich countries can invest in energy saving, as they can afford modern ICE vehicles and other power saving measures - developing countries need to increase oil and coal consumption first, then they can start to spend money on saving energy and CO2".

    I think this way of thinking is outdated. I had a Danish Minister for Energy and Environment complain to us that developing countries are in a great position as they don't need to keep their coal power plants alive to pacify angry voters. He was jealous of developing countries being able to invest in wind / solar without inner-political backlash.

    So today, smart countries invest in solar and wind from the getgo. And that's what we are seeing all over the world.

    The impact this will have on oil will depend on the speed of adoption of renewable energy alternatives. But outside the transport sector (where I'm not yet fully convinced), I don't really see any real and meaningful growth for coal, oil or natural gas demand in developing countries, either.
  • John Smith on March 29 2017 said:
    Peak supply and peak demand will occur at exactly the same time. Supply = Demand, always, regulated by price.
  • Outsider on May 23 2017 said:
    The revolution in energy consumption will be likened to that of communication. Developing countries skipped investing into landline phones and invested in mobile phones from the start when the technology was developed. The solar and wind is getting cheaper and investing in carbon energy might be skipped. The other point which is often omitted is that people like to live in non polluted areas, so high carbon emission might be banned anyway.

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