In 1956, a geoscientist named M. King Hubbert formulated a theory which suggested that U.S. oil production would eventually reach a point at which the rate of oil production would stop growing. After production hit that peak, it would enter terminal decline. The resulting production profile would resemble a bell curve and the point of maximum production would be identified as Peak Oil, a point of no return.
The original peak oil curve
Image Source: Cornell University
Hubbert first predicted that U.S. oil production would peak in 1970 and then start declining rapidly. His prediction turned out to be partly true, as U.S. crude oil production peaked that same year, not to be eclipsed again until the shale boom began.
Annual crude oil production (in thousands of barrels per year) for entire United States, with contributions from individual regions as indicated.
“The end of the oil age is in sight, if present trends continue production will peak in 1995 -- the deadline for alternative forms of energy that must replace petroleum in the sharp drop-off that follows." This is what Hubbert had to say in 1974, based on 628 billion barrels of proven oil reserves. However, his prediction didn’t turn out to be true, as global oil production continues to surge, thanks to new oilfield discoveries and improved exploration and drilling technology.
World oil and other liquids supply, broken out into crude and condensate, natural gas plant liquids, other liquids (mostly ethanol), and processing gain (increase in volume from refining heavy oil), based on EIA data.
In fact, the below graph shows that even while U.S. production declined between the 1970s and the 2000s, global crude oil production has increased consistently from 1965 to 2015 and there isn’t any bell curve depicting the peak oil phenomenon.
Image created with data gathered from BP Statistical review2015.
In short, we have yet to see evidence that we are nearing a peak in oil production. On the contrary, agencies like EIA and IEA have predicted a stable increase in crude oil production for the next few years at least. Related: Oil Demand Weaker Than Many Expect
But supplies may not be the only, or even the most important factor when analyzing the end of the oil era. The world is making progress at moving beyond oil. So instead of discussing Peak Oil in terms of supply, perhaps it is now more useful to analyze ‘Peak Demand’.
A supply- demand curve showing the conventional law of demand
If oil prices followed the conventional law of demand, then low oil prices would result in a higher consumption rate. However, 2014 saw something remarkable happen. BP notes in its 2015 Statistical Review that energy consumption grew at just 0.9 percent in 2014, the slowest rate in almost twenty years. That came even as prices declined.
The 2014 Oil Price Shock did not improve the consumption rates in North America, Europe and Eurasia
Image Source: FT.com Related: The Dark Side Of The Shale Bust
What if demand growth keeps slowing? Does this trend indicate that global demand for crude oil will eventually hit a ceiling? "Global oil demand will peak within the next two decades”, said energy expert Amy Mayers Jaffe in a recent article for The Wall Street Journal.
What could make oil demand peak within the next two decades?
It is interesting to note that almost 50 percent of crude oil is used for producing gasoline which is mostly used in the automobile industry. So what happens when people stop driving cars that run on gasoline?
Image Source: Curious.org
Global sales for electric vehicles (EVs) have risen at an amazing rate in the past few years. The market for electric vehicles in China, the U.S., and Japan, which have the highest number of conventional vehicles, are witnessing EV growth rates of 120%, 69% and 45% respectively. Although growing from a small base, EVs are steadily making progress at becoming a mainstream product.
Although EVs are priced higher than conventional cars, their lower operating costs would offset their initial purchase price in just few years. Ucsusa.org even concludes that EV owners can save as much as $1,200 annually when compared with a conventional vehicle (27mpg) running on gasoline at $3.50 per gallon.
If and when EVs become mainstream, demand for gasoline and crude oil will start declining.
Another noteworthy development comes from auto major Audi, which recently created a ‘blue crude’ which can be converted into a carbon neutral ‘e-diesel’ using a simple three step process. This new technology is getting the full support of the German government as it produces lesser CO2 emissions and could be a potential game changer in the near future.
Whether or not EVs become the most sought after technology in the future, it is clear that scientists and engineers are developing ways of moving beyond oil for transport.
There are not a lot countries that still generate electricity using oil, but there are a few. Saudi Arabia stands out. But Saudi Arabia is reportedly planning to add around 54 GW of power by 2032 from renewables, out of the total power around 41 GW would be from solar energy. “In Saudi Arabia, we recognize that eventually, one of these days, we’re not going to need fossil fuels. I don’t know when - 2040, 2050 or thereafter. So we have embarked on a program to develop solar energy. Hopefully, one of these days, instead of exporting fossil fuels, we will be exporting gigawatts of electric power,” oil minister Ali Al Naimi of Saudi Arabia said at a conference in May.
The biggest factor that supports renewables is their growing affordability. As costs of production continue to decline, renewables will continue to edge out fossil fuels in a variety of sectors. For the few countries that still use oil for electricity, renewables will slash oil demand. Related: Could This Renewable Fuel Kill The EV Market In One Fell Swoop?
Bolstered by strong internal demand and robust economic growth rate, China is the world’s second biggest consumer of oil after the U.S.
China imported around 5.5 million barrels per day in month of May, a steep decline from the record 7.4 million barrels per day in April as its refineries were down for their annual maintenance. However, oil markets could be in for a shock from China soon, as the Asian giant is currently busy filling up its strategic petroleum reserves (SPR) thanks to low oil prices.
China already has more than 12 SPR sites and it plans to further increase its SPR capacity from 250 million barrels to 500 million barrels by 2020. So what happens once this target is achieved? “We need to understand the dilemma of hidden demand in China, where you have two types of demand - normal demand and strategic stockpiling. The latter won't last forever,” this is what Jamie Webster of IHS had to say in a recent interview with Reuters.
What happens when China’s huge appetite for oil starts reducing in the coming years? It would bring the world economy even closer to peak oil demand.
By Gaurav Agnihotri for Oilprice.com
More Top Reads From Oilprice.com:
- Don’t Believe The Hype On U.S. Shale Growth
- Oil Prices Responding Positively To Bad News, But Why?
- The Front-Runners In Fusion Energy