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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