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Robert Rapier

Robert Rapier

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Peak Oil Is Not The Same As Peak Demand

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Following my previous article — Peak Demand? No, A New Gasoline Demand Record— I received some interesting feedback from readers. It quickly became apparent that some didn’t understand that the current discussions around “peak oil demand” are quite different than the “peak oil” arguments that were popular a few years ago.

Some interpreted my headline to mean that peak oil is a myth and that oil supplies will simply continue to grow. Actually, I was addressing the irrational exuberance around the near-term peak oil demand argument, which is something entirely different.

So, let’s review.

Almost from the beginning of the U.S. oil industry, there have been those who suggested that it wouldn’t be long before oil production began to inevitably decline. The layman’s understanding of “peak oil” typically boiled down to “The world is running out of oil.”

But that was a misunderstanding of the actual peak oil argument. It wasn’t that the world was going to run out of oil, it was that oil production would begin a long decline and cause havoc in a world that is still highly dependent upon oil. A decade ago many prognosticators made dire predictions of the consequences of peak oil, pointing to events like the 1973 OPEC oil embargo or highlighting the fallout whenever oil shortages took place in an area.

Simply put, modern civilization can’t function without oil, so peak oil necessarily meant dire consequences. Books were written on the concept. In 2005 the late Matt Simmons published Twilight in the Desert , in which he argued that oil production in Saudi Arabia was nearing terminal decline. Related: This Critical Oil Price Divergence Could Boost US Exports

For a while, it looked like Simmons could be right. Production in Saudi Arabia remained flat, global demand continued to grow, and oil prices skyrocketed above $100 a barrel (bbl). These were just the types of consequences predicted by the peak oil camp.

Fast forward a few years, and after falling for nearly 40 years, U.S. oil production began to surge as a result of the marriage between hydraulic fracturing and horizontal drilling. It turns out that high prices can indeed enable a lot of new oil production, which was perhaps the biggest blind spot among the near-term peak oil adherents.

That’s the peak oil argument in a nutshell, but the peak demand argument is entirely different. In this case, oil production falls — not because of geological factors — but because the world turns its back on oil as cleaner, cheaper options become available. Electric vehicles and ride-sharing on a massive scale are envisioned as two of the key factors that will make oil obsolete.

The biggest difference between peak oil and peak demand is that a peak oil scenario leads to much higher oil prices and havoc with the global economy. A peak demand situation, on the other hand, means plunging oil prices and a world economy that just keeps growing uninterrupted. It means no inconvenience for anyone, as we continue to happily motor along. Who needs oil when Elon Musk is going to fly down in his Iron Man suit and deliver cheap electric cars to the masses? Related: Is This The First In A Slew Of Megadeals In Oil?

Fear of peak oil was likely one factor that helped keep oil prices hovering around $100/bbl for so long. Ironically, today I believe widespread acceptance of the peak demand argument is a factor in keeping oil prices depressed. Many expect that oil will soon be obsolete, and who wants to invest in oil in that case?

I believe some version of the peak demand scenario will be true eventually, but I think many of the proponents of this scenario have gotten ahead of themselves. I would argue based on the data and trends that we can observe, we aren’t likely to see peak oil demand before 2030 (assuming we don’t see peak oil first).

That means the world will need to need to keep growing oil supplies for at least another decade. This is important when some are arguing that oil demand will start shrinking in just a few years. Such a disconnect between expectations and reality can create a mismatch between oil supply and demand, which may usher in a return to high oil prices.

By Robert Rapier

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  • Jhm on August 23 2017 said:
    It's good to make a distinction, but the two may be intertwined. Suppose that the price of oil remains low enough, long enough that production begins to decline. That's a production peak. But then suppose that demand is no longer strong enough to push prices high enough, long enough for production to climb back up to the prior peak. So weak demand allows the production peak to stand.

    To make matters more confusing, it is even possible that consumption continues to climb well past this production peak. This would be made possible buy having a very large inventory going into peak production. Once the market realizes that demand is not strong enough to grow supply any further, inventory may be sold off on expectation of lower prices to come.

    Thus, the consumption peak can happen after the production peak. The precise timing of they two may have more to do with short term dynamics around the peak.

    The important thing to observe is that supply is dependent on price. The true meaning of peak oil demand is not that consumption goes down, but that consumers become unwilling to pay a price for oil high enough to keep growing supply.

    It is quite possible that demand above $50/b is too thing to continue to grow supply. If supply can keep growing below $50/b for a long time, then consumption can continue to grow. From this perspective we may actually be a peak demand right now and not know it. The test comes when production declines, but the price of oil fails to rise high enough to resume growth.
  • Josh Gregner on August 23 2017 said:
    So if peak demand will be coming one day. Why only in 2030? Why not in 2040? Why not 2025?

    Lots of words - not many numbers. The oil demand globally has been rising about 1.5% annually (roughly 1.5 m b/d). That forecast for 2017, 2018 etc. seems increasingly shaky and less certain.

    With battery prices falling even quicker than the price for solar, we will see long-range heavy duty EVs pop-up in the coming 5 years. This will kill all oil demand growth. In China today about a third of domestic growth is already killed by the >100.000 electric busses that were bought in 2016. In just 3 to 5 years China's Diesel demand will not grow. And their EV quotas (8% as of 2018!) will kill petrol. Without China, there will be no growth. So I think assuming 2030 for peak demand is very risky...

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