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Robert Rapier

Robert Rapier

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The Reality Of The End Of Oil

The Oil Age has powered the world for well over a century. There have been two general schools of thought about how it will ultimately end.

There were those who believed that oil production would peak and begin to decline in the face of high global demand. This is essentially the peak oil argument, which many laymen mistakenly understand as “The world is running out of oil.”

In reality, the argument 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.

This version of the end of oil became very popular just before the shale oil boom. The idea was neatly summarized in 2005 when the late Matt Simmons published Twilight in the Desert, in which he argued that oil production in Saudi Arabia was nearing terminal decline.

In this version, there is no easy replacement for oil, so oil prices skyrocket above $100 a barrel (bbl) as people seek to maintain mobility. In fact, for a while it looked like this version might play out.

But growing shale oil production largely burst that bubble in 2014, when it became clear that there was still a lot of oil to be produced.

Fast forward a few years, and a new version of the end of oil began to take hold. In this version, exponential increases in electric vehicles (EVs) and ride-sharing are predicted to be two key factors that will make oil obsolete.

Premium: A Global Oil Cartel?

In this version, oil prices plunge as demand starts to fall. This is the exact opposite of the peak oil argument, where oil prices surge as supply starts to fall.

As Michael Liebreich, the founder and senior contributor of Bloomberg New Energy Finance, recently put it on Twitter: “I’ve always said the end-game for oil is not when it reaches $200/barrel, it’s when it settles at $20/barrel.”

I felt like it would be likely that we would see some combination: A period of shortages and high prices, but ultimately a peak in demand that would lead to lower prices. I wrote an article nearly three years ago outlining that view. However, I felt like that point was probably a decade away. And it would be highly dependent on whether U.S. shale oil production continued to grow.

One thing the coronavirus (COVID-19) pandemic has done is to collapse oil demand, and subsequently prices. The world still needs oil during this crisis, but what we are seeing today is exactly what I think we would see in the peak demand scenario.

In that case, we will see the need for a much smaller oil industry. And that is likely where we are headed now, with oil prices in the $20s, and the timing of a recovery still uncertain.

I believe what we saw in the 2005-2014 time frame was a preview of the peak oil scenario. Oil company revenues were skyrocketing during this period, and energy stocks were one of the best-performing sectors.

But today, we are seeing a preview of the peak demand scenario. That outcome is very different. In this scenario, only the strongest oil companies survive, and the sector becomes one most investors would rather avoid.

Are we there yet? I don’t think so, but it is hard to say what the lingering impact on oil demand will be from the coronavirus pandemic. When oil demand dropped during the 2008-2009 financial crisis, it bounced back strongly in 2010. I am not so sure that’s going to happen this time. This pandemic seems destined to change our world in a number of ways, and some of those ways involve lower oil demand.

If that transition starts to happen in earnest, then the peak demand scenario that I thought we would see in maybe 2030 will be here a lot sooner than that.

By Robert Rapier 

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  • Norman Clark on April 11 2020 said:
    I, for one, barely use my car ( even before he covid ). We NEED oil, and always will, as so many things are made out of oil ( even electric cars need oil products ). BUT the demand will plummet and we will be living a new reality....
  • Mamdouh Salameh on April 11 2020 said:
    If anything, the coronavirus outbreak and its destructive power of the global economy and the global oil market has proven irrevocably how inseparable the relation between oil and the global economy by demonstrating that destroying one automatically destroys the other and vice versa.

    The often quoted statement attributed to the former Saudi oil minister Sheikh Ahmad Zaki Yamani that “the Stone Age came to an end not for lack of stone and the Oil Age will end long before we run out of oil” is not accurate. The Stone Age has never ended. It is still with us to this very minute in the form of the stones we continue to use to build houses, bridges and monuments. What has ended is only an aspect of the Stone Age, namely tool-making from stone, which has been substituted for practicability by bronze and metal tool-making with the advent of metalworking, namely, smelting of Bronze and Iron.

    The same logic applies to oil. There could never be a post-oil era nor a peak oil demand either throughout the 21st century and far beyond because it is very doubtful that an alternative as versatile and practicable as oil, particularly in transport, could totally replace oil in the next 100 years and beyond. Oil will continue to reign supreme throughout the 21st century and far beyond.

    The global economy is made of three ingredients, namely, global investment, the oil and gas industry and the economies of the oil-producing nations of the world. Each one of them is dependent on oil. Without oil, there will be no global economy as we know it.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • James Hilden-Minton on April 11 2020 said:
    Peak demand has little to to do with volume consumed. Rather demand becomes so weak and elastic that prices do not remain high enough to sustain production volumes. As production volumes fall price response is not sufficient to bring product back to former levels.

    Oil looks to be headed into a multiyear glut. Even if consumption volume were to pick up, this does not mean that prices will head back to $60/b or whatever attract serious investment in production growth.

    Consumption of underpriced surplus is not real demand, just the elasticity of demand. What enabled OPEC to extract high prices in the past was very inelastic demand. In 2009-2014, highly inelastic demand meant that consumers where willing to pay upwards of $100/b to keep expanding the supply of oil. And that was high enough to tech breakthroughs in shale production. But today it seems rather unlikely that consumers would pay $100/b to add 1 mb/d to supply. Why should they? RE, batteries, EVs, and even natural gas provide much cheaper alternatives than $100/b for a marginal 1 mb/d of oil supply. Even fuel efficiency gains in autos were able to surrender consumption in OECD countries prior to 2015 in lieu of paying $100/b. Other technologies like teleconferencing enable a whole globe to stay connected while remaining at home.

    The point here is that for a high enough price, consumers are willing and able to cut consumption. Demand is increasingly elastic. So the question becomes, how long do producers want to oversupply the market and suffer low prices? Total crude revenue peaked years ago. It's not coming back.
  • Arch Region on April 11 2020 said:
    It is ironic we are not running of oil, we are running out of storage.
  • GJ NA on April 12 2020 said:
    I've been reading oilprice.com for a while now and the articles keep changing direction almost every day with high clickbait style captions. It's starting to get annoying cause the writers simply don't know and are just speculating. This article for instance completely ignores the fact that EV'are still only a tiny part of global transportation. If we don't even have the infrastructure in the West to cope with all cars being EV's, where does that leave emerging markets that often don't even have running water or sewers. You think they will have the infrastructure and wealth to implement (including buying EV's) all of this in the next 50 years? And what about remote regions? And we haven't even spoken about the problem of battery supply and components that for the foreseeable future can't be built without rare earth metals like cobalt which in turn has its own environment and human rights issues. It's also very naive to think that we can get heavy industries, aviation and shipping to run on batteries and green power all of a sudden, especially taking the above into account. It will be a near impossible job to get airplanes and ships running on batteries simply due to the limitations this technology brings, mostly in range, weight, endurance and achievability. So unless we invent some miracle power source like fusion batteries, I believe we will not see the end of oil and gas for at least another 50 years, maybe a even 100. Will it gradually decline, yes, but there will still be a demand. And where there is demand, there is higher prices and where there's higher demand there's profitability and companies exploiting that. So predicting nobody will use oil and gas anymore and the industry will be gone is utopia thinking for the time long time being in my opinion.
  • Sil on April 12 2020 said:
    What about artificial oil? E.g. from modified bacteria? Or factories such as climeworks? Would be ecologically and no batteries would be necessary.
  • ChrisWay on April 12 2020 said:
    Your thesis would be entirely correct IF the worlds population is prepared to stay at home and forego road and jet travel post CV19. You can talk up demand destruction all you want but A. People will not forego travel for business or recreation B. There is no replacement for jet fuel and thus jet planes and nothing on the horizon? C. EV’s haven’t materially replaced cars and won’t - plus coal generates the electricity anyway so what advantage? Your article is misinformed. The world you may see isn’t the one the rest of the planet sees so why even discuss it?
    The answer remains as clear as it was before this crisis - CCUS and CCS putit in the ground as we have done with other wastes for years, including nuclear. Support this industry don’t write articles that deny the needs of the population.
  • Bradley Steeg on April 12 2020 said:
    Walmart has grocery order online with unlimited delivery for $98/year. For the same price as a Costco membership I don't need to get in my car to fight traffic, park in BFE, navigate my shopping cart through isles jam packed with impulse buy garbage, fill my cart with massive quantities of stuff so I don't have to come back soon, scan to find the fastest moving line then wind up in the slowest, then shuttle my groceries home.

    Is that not worth $8/month?

    A few specialized cars making grocery deliveries is a lot more fuel efficient than thousands of cars on the move. Coronavirus is teaching us to keep our cars in the garage and it is making consumers aware of better ways of doing things.
  • M M on April 12 2020 said:
    I do not believe I completely agree with everything here. My reason is thag we are not demanding less oil today because anything more than the pandemic itself. I do not believe we will continue to see our commercial airlines grounded. I do not expect to see Americans staying off the highways. I do, however, expect to see a social change in the way meet, greet, and communicate with each other, which is sad, because in this day we tend to focus more on our electronic comminucations rather than actual human interactions.
  • J S on April 12 2020 said:
    Too bad the world runs on Petro dollars. It oul went away, alot of economies would crash.
  • Andrew M on April 13 2020 said:
    This is wishful eco nut dreams. We have hundreds of years of oil, natural gas and coal. Wind and solar are not worth their cost, the millions of birds they kill or the millions of acres of land solar would require. Like it or not fossil fuels are going to be the dominant source of energy for the forecable future.
  • Bob Forbes on April 16 2020 said:
    The world runs on oil like it or not, and it’s going to be back in demand again fairly soon and back in the $60 to $80 range.
  • s s on April 26 2020 said:
    we have reached the peak!
    Americans have an obsession with the automobile myself included! I used to own a Duramax diesel truck that I loved! I just got tiered of spending $80-100 on fuel every time I filled it up!
    sold it and bought a Tesla. I came to the conclusion that E/V are the cars of the future, there will still be gas cars around 10-20 years from now but the vast majority will be electric. Just like the horse and buggy were back in the 20s.

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