Get yourself a ruler, a pencil and a piece of paper. Place the ruler at about 45 degrees and draw a line upward across the page.
That’s what a chart of world oil consumption looks like over the past 30 years, give or take a few shakes off the line (Figure 1).
That was easy. Now think about how to draw oil consumption over the next three decades.
Plenty of pundits are scrubbing their spreadsheets and fidgeting with their rulers to show us the answer.
Some forecasters are economists who work for multinational oil and gas companies and government agencies. Most of their oil outlooks extend upward. The biggest uncertainty is the angle of their rulers.
The steepest slope assumes that our prevailing consumption habits and government policies are extended out a few more decades. Oil demand reaches nearly 120 MMB/d at the top of this cluster, up almost 25 percent from today. More moderate trajectories in the group are based on pledges made pursuant to the November 2015 Paris Climate Change Conference; but tallying up country commitments still suggests modest growth to between 100 and 105 MMB/d by 2040.
A group of weaker outlooks tilt downward like a loosely held hockey stick. Clustering between 73 and 80 MMB/d by 2040, this collection of prognostications assumes more aggressive global efforts to limit carbon loading in the atmosphere and the faster adoption of innovations like electric vehicles. The International Energy Agency’s 450 Scenario is the most bearish demand outlook among these peers. Related: Can Canada’s ‘Gas City' Replicate Qatar’s Success?
Environmental groups don’t equate fossil energy usage to classroom instruments or clichéd sports equipment. Slick oil charts from naysayers with green-coloured glasses look more like a BASE jump gone badly. The most catastrophic scenario appears to come from Greenpeace, which proposes that pipelines will trickle in the range of 35 MMB/d by 2040.
What and whom to believe? The range of consumption estimates 25-years out is wider than the tailgate of a Ford F350; on one end is 35 MMB/d, on the other 120 MMB/d. Even the top cluster varies by 20 percent
Given the 80 MMB/d range in opinions and analyses (each convincing on their own), stakeholders in the oil business may feel a tendency to adopt a, “the truth lies in the middle,” forecast. This method instructs us to believe a midpoint somewhere between denial and exuberance.
Taking the median of all expert opinions and calling it the “consensus” of wisdom suggests oil demand will drop by 20 percent over the next quarter century. I don’t find this approach satisfying. Looking through a row of ten cloudy crystal balls doesn’t yield a new one of greater clarity. Related: Biggest Gasoline Glut In 27 Years Could Crash Oil Markets
For over 100 years, the oil industry and its stakeholders have believed that the market for their products will continue to grow ad infinitum without competitive challenges. Today, that thesis is about as useful as a bent ruler and a broken pencil.
Never in my 35-year career following energy markets has there been so much widespread disagreement about future demand for oil. And it’s a relatively recent confusion, one that’s been emerging over the past decade, but heightened in the past couple of years due to the potential forces of technological change and carbon regulation.
An 80 MMB/d disagreement in various outlooks says to me that there is little value to add by uploading yet another spreadsheet into an already foggy cloud of forecast charts.
I’m only confident in one fact and one forecast.
Fact: There is widespread ambiguity in expert outlooks for oil consumption, one of the world’s most vital commodities.
Forecast: The uncertainty is not going to diminish over the next five years at least. In other words, trends in technology, policy, economy and social factors are going to put wider and wider error bars on every pundit’s numbers.
In my mind, the fuzzy question of, “How much oil is the world going to consume by 2030 and beyond?” must now yield to sharper, qualitative thinking.
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Pencils and rulers down, the questions going forward are, “What type of decisions will be made—relating to investment, corporate strategy, government policy and so on—under unprecedented uncertainty, and how will these near-term decisions affect the world’s long-term energy future?”
I’ll be pondering answers to these questions during my commute to work and back – in my new electric vehicle.
To be continued…
By Peter Tertzakian for Oilprice.com
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I am an econometrician. I find it helpful to model the expansion of battery production capacity, gigafactories to borrow a Muskism. This is a battle of batteries versus barrels. I reckon that about 10 TWh of Gigafactory capacity is needed to eliminate oil from the energy market. And this require only about $1T in investment. So the fate of the oil industry hangs on how quickly this capital can be mustered. 10 TWh of gigafactories is possible as early as 2030.
So the pace of investment is the critical question. And this hangs primarily on the price of batteries. As companies like Tesla drive their pack cost below $125/kWh they will be able to produce electricity vehicles at lower cost than ICE vehicles. This ignorable the cost of energy for respective vehicles. So at this point, it matters little what the price of oil is. This puts traditional automakers in crisis. If they continue with ICE vehicles, they are at a cost disadvantage to EV producers. Thus their already narrow margins shrink, and they become insolvent. Or they learn to make compelling electic vehicles. Investment in Gigafactories will be the critical issue of who survives and what market share they possess in the new battery economy.
This hits not only automakers, but oil producers as well. If you consider that 10 TWh of Gigafactory capacity displaces the oil industry, what share will oil producing countries hold? If Saudi Arabia wishes to hold comparable market power in the battery economy as it does in the oil economy, the kingdom needs about 1 TWh of capacity. Likewise, the UAE needs about 300 GWh. If these countries fail to make such investment, they will surely lose share in the transport energy market. Gigafactories are a perfect hedge for the risk of disruption from batteries. So once players like the UAE recognize that the name of the game is owning a share of 10 TWh gigafactories, investment capital will flood into this space. Thus, it would be a small thing for oil producers to pony up $1T to stay in the transport energy market over the next twelve years.
Or they could do nothing and watch price competition push the price of oil below $25/b as market power evaporates. When oil is obsolete, it matters little what quantities are produced. A $1T investment in Gigafactories wipes out $17T of value in oil reserves. If this reality is not already driving a perpetual oil glut, then wealthy reserve holders need much smarter class of advisors.
Looking forward to part two, JHM
Which is fine. He just shouldn't pretend his crystal ball is any better than anyone else's.
The key question is overall, how rapidly will non-ICE alternatives become truly cost competitive, so that a MEANINGFUL proportion of the global population will WANT to adopt them?
The rest, aside from trying to forecast global GDP, is pro or anti oil rhetoric at its core.
Since I think AGW is one of the biggest problems facing humanity over the next century, I HOPE that alternatives to the ICE win out, soon, and big time.
Given how the real world runs, I'm far less than sanguine this will happen.
For example, recently (mid Jan.) I needed a new car (I gifted my 2+ year old, very low mileage daily driver to help out a family member AND avoid the absurd gift tax, courtesy of Uncle Sam).
So I wanted a practical, reliable PHEV, and considered the Toyota Prius Prime. It seemed like the sweet spot between efficiency and cost, for my low mileage daily driving habits.
But I couldn't see one without a drive to another state. I couldn't get one without ordering it months ahead of time. The charging plug is on the "wrong side". With my wet carport, that takes dicey to no good for charging. I was giving up a LOT of space and capability to get a net $23,000+ car, before sales tax.
So I looked at the Camry Hybrid. With the cost of gasoline, the payback period is insane. The choice was VERY poor relative to the standard ICE Camry's.
ICE Camry's were having major sales. I effortlessly got exactly what I wanted with no real bargaining (I just placed a bid, and then was told I could have a wide choice of cars with the same deal, re about 20% off MSRP). So with an 8 year 75,000 mile extended warranty and the sales tax, I paid the $23,000+ I would have paid for the Prius Prime before sales taxes and with no extended warranty. I got much more car. I can be much more confident about the reliability.
Yes gasoline will be more expensive, but I don'd drive much anyway.
I think that until/unless either the governments have the guts to mandate big CO2 taxes on FF's (which I'm very in favor of, and which would dramatically alter the cost equations for various car types) or until the costs of PHEV's and EV's fall meaningfully due to better battery technology, that given low oil prices (if they persist, and no one really knows) -- no meaningful penetration of the BEV's and PHEV's is likely to occur.
No matter how much distortion comes from the pure greens at any cost OR the oil industry.
And before you call me an oil industry shill, I'm all for a CO2 tax on transportation fuels of $2200 a metric ton. That's right, of $1 a POUND of CO2, or roughly $20 a gallon of gasoline.
I think this is so important it should replace significant income taxes to make it affordable.
Given the trivial taxes the politicians are discussing, and not passing, I don't see CO2 taxes making a MEANINGFUL dent for decades.
We're entering a phase where renewable energy may not be cheaper than fossil fuels, but it is lower risk, as future predictions of oil&gas price&demand (&profits) are all over the board (as well explained here), while wind turbines & solar panels are basically prepaid electricity.
Consequently, smart managers of energy systems and investment funds need to invest in a portfolio of generation sources which will minimize both expected & worst-case returns on investment. In 2016 wind & solar only produced ~6.8% of US electricity, while both are often cost competitive with dominant legacy fuels like coal (~30%) and gas (~33%), and prices are falling fast. Such a portfolio mix might make sense 5 years ago when wind&solar cost more (and legacy energy was the only game in town), but now it needs to be rebalanced toward a mix that makes sense 5 years from now. This seems to be exactly what many fund managers are doing. It is only earth shaking because legacy fuels like coal, oil & gas used to be the only game in town, so took the lions share of energy investment: now they must make way for alternatives.