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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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Peak Oil Demand Is A Slow-Motion Train Wreck

oil

Will oil demand peak within five years? 15 years? Or not until 2040 or 2050?

The precise date at which oil demand hits a high point and then enters into decline has been the subject of much debate, and a topic that has attracted a lot of interest just in the last few years. Consumption levels in some parts of the world have already begun to stagnate, and more and more automakers have begun to ratchet up their plans for electric vehicles.

But the exact date the world will hit peak demand kind of misses the whole point, argues a new report, which is notable since it is coauthored by BP’s chief economist Spencer Dale, along with Bassam Fattouh, the director of The Oxford Institute for Energy Studies.

They argue that the focus shouldn’t be on the date at which oil demand peaks, but rather the fact that the peak is coming at all. “The significance of peak oil is that it signals a shift from an age of perceived scarcity to an age of abundance,” they wrote. In other words, oil won’t be on the only game in town when it comes to fueling the global transportation system, which will have far-reaching consequences for oil producers and consumers alike.

The exact date is unknowable, and in any event, the year in which the world does hit peak consumption won’t result in some abrupt “discontinuity of behavior,” the report argues. Demand growth will slow and then decline, but probably won’t fall off a cliff. So, the exact date of peak oil demand is “not particularly interesting.”

Nevertheless, the implications of a looming peak in oil consumption are massive. Without an economic transformation, or at least serious diversification, oil-producing nations that depend on oil revenues for both economic growth and to finance public spending, face an uncertain future.

Related: Global Clean Energy Investments Near All-Time High

And slowing demand growth is occurring at a time when supply is less of a concern than it used to be, in large part because new drilling technologies have led to a wave of supply from shale. “The world isn’t going to run out of oil. Rather, it seems increasingly likely that significant amounts of recoverable oil will never be extracted,” the authors wrote.

One of the more intriguing conclusions from the report is that this new “age of abundance” could alter behavior from oil producers. In the past, some countries (notably OPEC members) restrained output, husbanding resources for the future, betting that scarcity would increase the value of their holdings over time. “A high reserves-to-production ratio — implying a country could continue producing oil at the same rate for 80, 90, 100+ years — was a sign of both strength and intergenerational fairness,” the report said.

However, looking forward, if a peak in demand looms just over the horizon, oil producers could rush to maximize their production in order to get as much value for their reserves while they can. “Better to have money in the bank than oil in the ground.”

To complicate matters further, maximizing production to fight for market share would require hundreds of billions of dollars of investment. For instance, Rystad Energy predicts upstream spending will stand at $510 billion in 2018 (which is sharply lower than in years past). Huge sums will be required even just to maintain current levels of production.

That creates another problem. As the FT notes, extending the life of oil fields, let alone investing in new ones, will require marshalling such large volumes of capital, but that might be met with skepticism from wary investors when demand begins to peak. “When that shift occurs, from a growing industry to one in decline, you change investors’ perception,” Jason Bordoff at Columbia University’s Center on Global Energy Policy, told the FT. It will be difficult to attract investment to a shrinking industry, particularly if margins continued to get squeezed. In In that sense, the timing of peak oil demand does in fact matter.

Either way, peak demand should be an alarming prospect for OPEC, Russia, the oil majors — basically any and all oil producers who will find themselves fighting more aggressively for a shrinking pie. “Faced with the possibility that significant amounts of recoverable oil may never be extracted, low-cost producers have a strong incentive to use their comparative advantage to squeeze out high-cost producers and gain market share — just as with any other competitive market,” Dale and Fattouh wrote.  

Oil producers will need to adapt to a “higher volume, lower price” environment. For consumers, however, the shift will bring benefits, including more options and cheaper energy. Related: What’s The Limit For Permian Oil Production?

At the country level, this is scary stuff. Many oil producers have hefty spending requirements to satisfy their populaces, including for healthcare, housing, employment, etc. Ample global oil supply for the foreseeable future, combined with an eventual peak in demand, threatens persistent fiscal deficits and some hard choices.

Saudi Arabia has offered up its Vision 2030, which the report by Dale and Fattouh say is probably “the most prominent example of a major oil producer responding to the changing environment,” but economic transformations are incredibly difficult and would conceivably take decades to pull off.

It’s hard to imagine countries that depend on oil for more than 90 percent of their export revenue adapting well — it’s a slow-motion train wreck. Dale and Fattouh say it may require “an eventual adjustment in living standards,” which is a rather diplomatic way of putting it.

By Nick Cunningham of Oilprice.com

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  • Jhm on January 18 2018 said:
    Nice write up.

    We have probably already passed Peak Oil Reserves already, in the sense that any increase in proven reserves is unneeded. We could simply run off current proven reserves to satisfy all future demand for oil.

    This also means that oil reserves have lost substantial value. One could value reserves on a replacement cost basis, but if no replacements are needed, there is no real replacement value. So the value of reserves comes down to how easy they are to produce, how much one can save drilling and transport costs at a particular location.

    Furthermore, if there is no necessity to replace reserves, then the price of oil can drop to the marginal cost of oil without replacement. This theory predicts that the price of oil should be permanently lower post peak oil reserve and prior to peak demand.

    The huge advantage that OPEC and other large reserveholders have enjoyed is that all other producers had to factor in exploration and reserve replacement into their cost structure. That advantage was pure profit for large reserveholders who simply liquidate assets good for 60 years or decades more. But that advantage is largely gone. It will soon make sense for large reserveholders to open up their land to the highest bidder so as to monetize these assets before they are worthless.

    BTW, it is easy to model how battery production can ramp up faster than reserves can be liquidated. In that sense, EVs have already made oil reserves obsolete.
  • James on January 18 2018 said:
    This is a fairly good way to put peak oil demand in perspective. While I agree that predicting the date is hard and perhaps not the most important aspect, we have a few hints that we can use to put the date range for peak oil demand in perspective, take the industries most dependent on it for example; aviation, large scale shipping and freight, plastics/petrochemicals/feedstocks, fuel for the continuously-growing ICE fleet, all of these are expected to increase their demand for oil for the short-medium term, and regardless of what EVs marketshare and influence (disruption) is, the sectors still dependent on it will offset any negative impact EVs have on oil. If I were to give you my personal date range, I would say 2030-2050, it will likely not happen before 2030 and especially not before 2025. This is just my 2¢, not saying my thesis is correct or incorrect.
  • Mamdouh G Salameh on January 19 2018 said:
    It is debatable as to whether a peak oil demand could be reached during the 21st century. The one certain thing is that oil is expected to remain the world’s primary energy source throughout the 21st century and probably far beyond. A major underpinning factor is the growing world population.

    Still, oil demand growth could be projected to decelerate a bit on the back of efficiency improvements driven by technological developments, a tightening of energy policies and a relatively low (albeit increasing) penetration of electric vehicles (EVs).

    Oil will continue to be used extensively in the global petrochemical industry and other industries and outlets from pharmaceuticals to plastics, aviation and computers to agriculture and also in transport in most of the developing countries. Oil will continue to reign supreme throughout the 21st century and far beyond.

    And whilst experts around the world project the advent of the post-oil era within the next fifty years, the realities of the situation cast doubt on their projections.

    Some experts are now saying that widespread electric vehicle use could spell the end of oil. The tipping point, they reckon, is 50 million EVs on the roads. This they believe could be reached by 2024. However, 50 million EVs could hardly make a dent on the global demand for oil let alone replace it.

    Bringing 50 million electric cars on the roads will reduce the global oil demand by only 0.9 billion barrels (bb), or 3.9%. This will neither be the end of oil as some experts are suggesting nor a tipping point.

    Moreover, there will be a need for trillions of dollars of investment to expand the global electricity generation capacity in order to accommodate the extra electricity needed to recharge 50 million EVs.

    A tipping point for oil could only be reached once 739 million EVs (50% of the current global number of conventional cars) are on the roads worldwide within the next fifty years. This is impossible to achieve within that time frame.

    Saudi Arabia’s Vision 2030 is rather a belated attempt to diversify its economy and not the "most prominent example of a major oil producer responding to the changing environment" as the two eminent experts Spencer Dale and Bassam Fattouh stated. Diversification should have taken place 78 years ago when oil was discovered in Saudi Arabia.

    In conclusion, oil will continue to reign supreme through the 21st century and maybe far beyond. There will be no post-oil era throughout the 21st century and probably far beyond.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • petergrt on January 19 2018 said:
    "The one certain thing is that oil is expected to remain the world’s primary energy source throughout the 21st century and probably far beyond. A major underpinning factor is the growing world population."

    That statement is grotesquely silly as it is completely devoid of reality.

    Now, oil is expected to play an expanded role in providing row material(s) for plastics and such, but its role as the majormost provider of energy is already under attack.

    Peak-oil demand as a lot closer than generally expected.

    With about 80% of oil now being used for transportation, the following needs to be noted:

    a. Electrification of passenger cars is accelerating. While Tesla fetches the big headlines, virtually every major car manufacturer is now selling all electric cars, with plans for an avalanche of new models to be introduced within months. GM has no fewer than three all electric SUV's in works. BMW sold over 100K electric cars this year - did anyone even know that they have an electric car . . .?

    b. While Tesla again garners the headlines about producing electric tractor-trailer, all other truck manufacturers have been and plan introducing hybrid trucks soon, and the only difference is that they will actually deliver those trucks . . .

    c. Natural gas is increasingly being used in public transportation and even railroads are experimenting with the conversion.
  • Douglas Houck on January 19 2018 said:
    Another report stating the obvious, peak energy (including oil) demand is coming.

    A nice independent recent study by a firm with financial interests in both fossil fuels and renewable energy along with the transportation sector is called: DNV GL Energy Transistion Outlook 2017. See: https://www.dnvgl.com/technology-innovation/sri/climate-action/research-projects/energy-transition-outlook.html

    Since no one knows the future, they give as a base case:

    1) World Energy Supply peaks before 2030 as electricity grows its share of the energy mix and losses are reduced through the accelerated uptake of efficient renewable sources.

    2) Coal use has already peaked, oil will peak in 10 years, and natural gas within 20 years. Natural gas will be the largest single source of energy through 2050.

    3) The world will manage the shift to a renewable future without increasing energy expenditures; the future energy system will require a smaller share of Gross World Product (GWP) than at present.

    4) Electric vehicle take-up will be rapid and extensive — by 2033 half of new passenger cars sold globally will be zero emission.

    5) The energy transition will be experienced unevenly across the world. Regional energy transitions look very different: e.g. India joining China as a renewable ’superpower’;
    fossil-fuel dominant regions like the Middle East and Russia experiencing relatively slow transition.

    6) Renewable energy — notably wind and solar PV — holds the most potential for cost-competitiveness. Even so, fossil fuel will still comprise around half of the total energy supply in 2050.

    Worth the download.

    So yes, fossil fuel demand will stop growing resulting in a weird set of economics but still be a major source of energy, the world will exceed the 2oC temperature increase, and the world will continue and greatly increase on its current electrification of everything. Most all countries see the hand writing on the wall and are trying to plan accordingly.
  • petergrt on January 19 2018 said:
    Very good article about an excellent report.

    I must however take an issue with one of the commenters:

    "The one certain thing is that oil is expected to remain the world’s primary energy source throughout the 21st century and probably far beyond. A major underpinning factor is the growing world population."

    That statement borders on demagoguery, as it is grotesquely ignoring the real world trends.

    Oil is expected to increase its role in providing the row material(s) for plastics and likes, but as a source of energy it is already under a serious attack in a war that it cannot win. Survive, it will, but in ever diminishing importance.

    With about 80% of oil being used for transportation, the following needs to be noted:

    a. Electrification of passenger cars is accelerating. While Tesla fetches the big headlines, virtually every major car manufacturer is now selling all electric cars, with plans for an avalanche of new models to be introduced within months. GM has no fewer than three all electric SUV's in works. BMW sold over 100K electric cars this year - did anyone even know that they have an electric car . . .?

    b. While Tesla again garners the headlines about producing electric tractor-trailer, all other truck manufacturers have been and plan introducing hybrid trucks soon, and the only difference is that they will actually deliver those trucks . . .

    c. Natural gas is increasingly being used in public transportation and even railroads are experimenting with the conversion.

    d. In terms of adoption of EV's, America is thus far leading the way, but China, the World's larges car market, is getting even more aggressive against the use of oil for transportation.

    e. Several countries have either already enacted or are planning to enact the outright prohibition of manufacturing and selling of internal combustion powered vehicles within the next 15 to 20 years. Germany's ban is to start in 2030 . . .
  • Joe on January 19 2018 said:
    There will be a peak demand sometime, but when it occurs, world consumption will be way in excess of 100 million bbls per day. Check some of the articles written by Peter Tertzakian for more info. It's almost 100 million bbls per day right now and there will be a question on how high it goes before the peak is reached. However, the price does not necessarily collapse at that point because the other side of the equation is supply. For instance there are several things about to happen in the world that will give us a real lesson. The comparative inventory in the USA is about to bet back to normal. There is a large deficit in oil production development going on. It is true that at some point all US imports will be 90 % from Canada and the only imports from the middle east will be to get a price point for the Canadian imports.
    Slowly production will decline to balance with demand. Maybe 150 million bbls/day, then 149 million bbls per day 5 years later, then 148 millon bbls/per day in another 5 years later. Most reporters do not get that. It just doesn't drop to nothing in one day, one year or even one decade. As for Tesla; coming out with $35 K cars when you can buy family cars for $20 K is a long term losing proposition. Stay tuned for Tesla's 2017 year end. Nice Burn Rate.
  • Markp1950 on January 20 2018 said:
    Historically, EVERY TIME a disruptive tech comes in, once it hits a tipping point it hits on an s curve. Industry experts almost always get it all wrong. Which means change will happen VERY fast. They look at it linerally. It happens every time.
    It is a convergence of many technologies.
    1. Renewable energy.
    2. Storage
    3 EVs
    4 storage
    5 autonomous tech
    What is really remarkable is the competition out there. Everybody wants to be first.
    All that they have to do is to is to take off the top 5% in order to disrupt.
    Look at the work of Tony Seba....
    Once you know what to look at, it is very obvious that it is starting to hit now. 1st effects are obvious.
    It will be start to be getting strong about 2020. Predictions are at 80% of gas cars off of the road in 10 years..
  • SailSog on January 21 2018 said:
    Peak oil “demand” is a furphy. Or clever PR by the oil industry. Any Economics 101 student will tell you supply and demand are in balance and prices are driven by marginal revenues a costs. Peak oil is peak oil and will occur at some point. Shale (tight) oil is available only because interest rates are so low. How long the central banks can keep up this charade and are able to kick the can down the road is anybody’s guess. One thing is for sure: as an student if ecology I can tell you that humans are far into overshoot. How we manage the population decline to the long term carrying capacity for humans is unclear. Peak Oil is part of this equation.
  • Tony on February 15 2018 said:
    Pure fantasy. I can predict from just looking around. Everyone is driving and car and consuming gasoline. Everyone is heating their house with natural gas. All goods are delivered by trucks consuming diesel. This is a lot of energy.
    Demand will slow because people cannot afford to buy any more energy, not because some other energy is cheaper and taking market share from oil.
    There will be no "abundance". Just more people burning wood, riding horses and living with less.

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