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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Can Oil Demand Really Peak Within 5 Years?

Oil demand could peak as soon as five years from now.

Predicting the point at which the world reaches peak oil demand has become something of a cottage industry. The estimates range, but tend to fall somewhere around 2030 or later. However, two new predictions – just out this week – put peak oil demand as soon as the 2020s, perhaps around 2023, much faster than almost anybody is predicting, not least oil companies and their investors.

A new report from the Carbon Tracker Initiative says that a combination of technology, policy and “necessity” will translate into a peaking of oil demand in the 2020s. By necessity, Carbon Tracker refers to the need to transition to cleaner energy on environmental grounds and the drive to avoid the geopolitical pitfalls of energy dependence. Moreover, the “emerging market leapfrog” ultimately means that oil demand destruction could happen sooner than many people think.

“The motor of change now lies in the emerging markets, which is where all the growth in energy demand lies,” the Carbon Tracker report argues. “They have less fossil fuel legacy infrastructure, rising energy dependency, and are anxious to seize the opportunities of the renewables age. We believe it highly likely therefore that emerging markets will increasingly source their energy demand growth from renewable sources not from fossil fuels.”

The adoption of renewables at such a blistering rate will only be possible because costs continue to fall. Carbon Tracker argues that the rate of adoption for solar PV, wind, batteries and electric vehicles will follow an “s-curve,” referring to a period of slow growth that suddenly morphs into a steep growth curve after it passes a certain threshold.

The rapid adoption of clean technologies will force a peak in fossil fuel demand. “It’s not a scenario; it’s just obvious,” said Kingsmill Bond, new energy strategist and author of the Carbon Tracker report, according to the Wall Street Journal. Related: Pipeline Problems In The Permian Are Overblown

Carbon Tracker argues that there are three types of risk stemming from the coming peak: systemic risk to the financial system, country risk to major oil producers, and company risk to entities financially-tethered to fossil fuels. The total estimated value of fossil fuel infrastructure stands at about $25 trillion, the group says.

Also this week, a report from Norwegian risk-management company DNV GL comes to a similar conclusion as Carbon Tracker – that is, peak oil demand will arrive in the next half-decade or so. “The transition is undeniable,” said DNV CEO Remi Eriksen, according to the WSJ.

On the one hand, predicting the peak may not seem important so long as the trajectory in a rough sense is understood – oil consumption will eventually give way to efficiency and electrification. But, the timing of the peak is actually pretty important because even though complete decarbonization is far off into the future, the peak occurs early on in the transition. Carbon Tracker argues that looking at past technology transitions, peak demand tends to occur when the upstart technologies capture only 5 to 10 percent of the market.

More importantly, the period around the peak is when the incumbents start to suffer from the disruption. “Incumbents are typically impacted during the peaking phase because it is then that demand for their products peaks,” Carbon Tracker argued. The important measurement is not total demand, but the change in demand. Related: Is A New Crisis Brewing In The Saudi Royal Family?

In other words, while some skeptics argue that the world will need fossil fuels for decades to come, that misses the importance of hitting the peak. The real pain for the fossil fuel industry comes much sooner. Once the peak is hit, the troubles start to accelerate. Demand starts to fall, so fossil fuel companies face lower prices for their products, lower valuations and ultimately stranded assets. “We should then expect a major reallocation of capital, bankruptcy of companies that are unprepared, and sector restructuring as those who prepared for the shift take over the assets of those that did not,” Carbon Tracker concluded.

Investors are not going to wait for the complete phase out of fossil fuels before they start to redeploy capital and shun fossil fuel investments; that shift occurs much sooner, arguably around the peak.

The U.S. coal industry is a perfect example of this dynamic. Coal miners have gone bankrupt, share prices are in the toilet, and yet coal still accounts for around a third of U.S. electricity. The disruption happened long before the phase out of coal (the U.S. will still be burning coal for years); it happened when demand really started to decline.

The same sort of disruption could start to hit oil and gas companies as soon as the 2020s.

By Nick Cunningham of Oilprice.com

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  • Lee James on September 11 2018 said:
    I've been intrigued by this thought in the article: "“The motor of change now lies in the emerging markets, which is where all the growth in energy demand lies,” the Carbon Tracker report argues.

    Supporters of burning more fossil fuel say that, "we can't possibly deny the developing world the fruits of civilization. How can we with-hold from them the fossil fuels that built our developed world." Watch! I suggest that decentralization and localization of communications and energy infrastructure are the future.

    The developing world may prefer to spend their infrastructure dollars close to home. They are not nearly so driven and able to have large cars, homes , and piles of material things.

    Appetite for energy in the developed world has slowed. And development in the developing world may well be different than our own, with less appetite and more sustainability.
  • Dash on September 11 2018 said:
    I could have read this same article 8 years ago. There is still no viable alternative energy to power cars, airplanes, ships, etc...Tesla is not the magic pill. The big battery is catching on fire. There are real problems with developing alternatives to fossil fuels, kids. As far as "We have to hand it in on time or else we miss the carbon deadline!" Grow up. It is only an arbitrary marker; the world will not end. For the foreseeable future, fossil fuels are in abundance AND they are all that work. Peak oil? Oil will never go away.
  • Joe on September 12 2018 said:
    Oil is a finite resource, it's not like water, it's not renewable. Will we run out? We might not, we might all die-off before we run out. The inhabitants of Easter Island thought they'd never run out of trees. So, yes, the Earth will eventually make more oil but we are consuming it way faster than it can be made by the geologic processes. In other words, yes, we will run out if we continue to consume it roughly the way we are consuming it now. Do we need to use it for cars, planes, boats, etc., no, but we will continue to do so because we can. However, the many products that are made with oil cannot be substituted with any one resource so we will continue to have oil demand for many years but it too will peak, just as production will. The decline will present challenges but they will be dwarfed by the problems we are about to face with population growth and dwindling clean water supplies.
  • Mitch on September 12 2018 said:
    Wouldnt this require the number of EVs sold per year to be more than the number of ICE's sold netted against the number removed from service? We arent even close to that yet, but if it did happen in 5 years then fine. But what about plastics demand for crude? Marine and aviation will continue to grow as turning those to electric is further off than cars. 5 years is absurd to declare for peak oil demand. Its possible that could be the beginning peak for gasoline, about it.
  • Josh Gregner on September 12 2018 said:
    @Dash - so you don't think there will be a peak oil demand? Just one question: what do you think happened to the Coal Industry and why do you believe that will never happen to oil?

    Yes, Tesla alone is not going to move the needle. But China is determined to finally - after all these decades - break into the global vehicle market. The will do this using electric cars. It's not a secret, it is not a conspiracy, it is declared national Chinese strategy and has the full backing of the government. Have you been to Asia recently? All their bikes/scooters/motorcycles are already electrified. I didn't believe my eyes when I saw it! Have you heard that >70.000(!) electric buses are deployed in China every year for the past 3 years? What do you think this all will do if it continues for just a few more years?

    The point of the article is not to discuss oil consumption away. The point of the article is focused on the growth of oil demand only. That's currently at a fragile 1% (approx.) - a minor recession, a big move of China/India away from Diesel will kill that growth already.

    So how come you don't see these signs?
  • Mike H on September 15 2018 said:
    Good article!

    I like the comparison with the US coal industry to describe the effects of what happens after an industry reaches it's peak. The dynamic of an industry totally changes. Investors are always chasing growth and once that's gone raising money for capital investment becomes much more difficult.

    @dash Your ignoring reality;peak oil is coming and I think the mid 2020 is a good guess..2030 at latest. Huge strides have been made with the electrification of transportation. My own personal story. I work in the nuclear industry and took the plunge and bought an electric car. We are a two car family ( a gas minivan and an electric car) and the money we spend on gas has plunged by well over 50%. Why, because the electric car is cheaper to operate and because well over 90% of trps the electric car has enough range. Heck, even folks who buy plug in hybrids (ie Chevy volt) are realizing they never have to buy gas except for the occasional long trip.

    The changes won't be leaving linear around the world because of incentives and existing inferstructure but it is coming.

    Mike
  • Allan S on September 15 2018 said:
    Oil demand may peak due to a number of factors. But I am much more concerned about the limited lifespan of supply from existing fields. Working in the oil industry, I see projects that seem, on the face of it, absurd. In some projects, we are pumping 90% water to extract the 10% oil because the resources are just not out there. Oil supply peak is real and coming soon. The better question to ask is will supply keep up till demand peaks and then will the decline curves track without too much disruption to work energy markets.
  • Bill Simpson on September 25 2018 said:
    Demand for crude oil will never peak. It is too cheap and efficient an energy and chemical source, and has too many uses for which there is no cheaper substitute.
    What will actually happen is that the supply of oil will peak, which will force the global economy to stagnate, and thereafter begin to shrink from lack of affordable energy to perform needed work. A few years after that begins, look for an economic/financial meltdown the likes of which we have never seen. It will be like 2008 times 10.

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