For more than two years the oil industry has suffered through its worst down cycle since the 1980s, and relief may not come until the middle of 2017 at the earliest. Some argue that oil prices may take even longer before they rebound. But while oil executives are focusing on the next few years, a much bigger threat looms over the long-term: Peak oil demand.
A new report from the World Energy Council predicts that global demand for crude oil could hit a peak in 2030 at 103 million barrels per day. The scenario would require rapid and substantial advancements in electric vehicles, efficiency, renewable energy, and digital technologies – developments that are no longer difficult to imagine. Additionally, the report envisions a scenario in which global primary energy demand – which includes energy demand for everything including transportation and electricity – could also peak before 2030.
These conclusions fly in the face of the prevailing assumptions within the oil and gas industry, which assumes consistent and stable growth in demand for decades to come. The oil market has always gone through cycles, in which demand spikes or flattens out. The cyclical nature has overwhelmingly been due to the changing nature of global or regional economic growth. But while demand has always been a bit volatile in the short-term, oil demand has grown inexorably for more than a century as population and GDP expand. Recessions hit demand, but once economies recover, demand resumes its upward trajectory. This constant, almost a law of nature, makes it difficult for many to picture a structural, rather than just a cyclical, decline in oil demand. But many analysts, including the WEC, say that such a development is underway.
“Historically people have talked about peak oil but now disruptive trends are leading energy experts to consider the implications of peak demand,” Ged Davis, executive chair of scenarios at the World Energy Council, said in a statement.
The findings from the World Energy Council echo those of other oil market and clean energy analysts. Bloomberg New Energy Finance, for example, published a scenario earlier this year that detailed a decline of more than 13 million barrels of oil demand by 2040 due to the advancements of electric vehicles. That would erase roughly 13 percent of oil demand from today’s levels – which would still leave the world consuming a lot of oil 25 years from now, but the demand destruction would be enough to keep oil prices permanently low. BNEF expects the world to hit a peak in oil demand in the mid-2020s, a bit sooner than the World Energy Council report. Related: Is Clean Coal An Option For India?
“The longer-term outlook, beyond 10 years, is certainly less rosy,” Alex Blein, energy portfolio manager at Amundi, told Bloomberg an interview. “Given the advances in battery technology, by 2030 carbon-powered vehicles will be the exception rather than the norm. This will inevitably impact on oil demand.”
A lot will depend on government policy, of course. The WEC report says that in its low carbon scenario, in which governments impose costs on fossil fuels and incentivize EVs and renewable energy, global oil demand will still hit a peak around 2030, but at a much lower level of about 94 mb/d. Alternatively, the business-as-usual trajectory has the world heading for a peak of about 104 mb/d between 2040 and 2050. Obviously, the market dynamics are fluid, and great uncertainties remain.
The prospect of peak demand has huge implications beyond just the price of oil. The concept of “stranded assets” – oil and gas reserves that might not get produced, either because of carbon limits or because prices never rebound – has quickly moved from a far-flung scenario to a very credible one in the span of just a few years. Stranded assets would lead to massive write-downs for oil companies, with today’s overvalued share prices destined for decline. The misallocation of capital could be unspeakably large.
But the WEC report says the problem could be even worse than that, because much of the world’s oil and gas reserves are under state control. Peak demand could destabilize entire countries. “Demand peaks for coal and oil have the potential to take the world from stranded assets predominantly in the private sector to state-owned stranded resources and could cause significant stress to the current global economic equilibrium with unforeseen consequences on geopolitical agendas. Carefully weighed exit strategies spanning several decades need to come to the top of the political agenda, or the destruction of vast amounts of public and private shareholder value is unavoidable,” the report concluded.
By Nick Cunningham of Oilprice.com
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The focus should be on extraction and use of oil and gas in a natural friendly way, which reduces carbon foot print, that allows its co existence.
"the report envisions a scenario in which global primary energy demand – which includes energy demand for everything including transportation and electricity – could also peak before 2030."
To me this is a nonsense scenario. It requires immediate, significant reductions in birth rates around the world and a decision to hold standard of living around the world at a constant.
While it is possible to have a lower ratio of energy to population, this will be on the margin. It will not surmount the growth in population and the growth in demand for goods and services as people decide that they want washers and dryers and air conditioning and clean water and so on.
So, if this projection that oil and gas demand will hit a peak is dependent upon overall energy demand hitting a peak as well, then I consider this article to be fluffy bunny clouds.
But those are just the techniques that we already have. The real wildcard is something completely new, particularly compact fission. If Lockheed and others succeed in commercializing those plants by 2025, you can kiss fossil fuels goodbye entirely, except for chemicals. By 2030 you might not be able to buy an internal combustion car, at least not one operating on oil or gas sourced fuels.
As far as electric vehicles, it will take very expensive gasoline for them to really take off. Most cars aren't parked inside an enclosed garage, so it is difficult to charge them at home. And you need a special unit to charge them. That inconvenience, along with a shorter range than a gasoline vehicle, will encourage people to stick with gasoline cars until gasoline gets either very expensive, or is rationed.
Don't worry about the demand for oil products. Worry about what happens to the global economy when there isn't enough fuel available to keep the economy growing. It takes more energy to do more work. Stopping an economy starved for fuel, from shrinking into a collapse will be virtually impossible. But that is probably a decade or so down the road.
There was just now the announcement not to allow bunker oil for ships anymore from 2020 on. How will heavy oil producers react? They will sell come hell and water over the next three years all what they can sell, because they will probably get nothing after 2020. This alone will drive down oil prices over the next three years.
So, investors beware. Instead of huge gains, they expect, they could soon sit on some worthless papers very soon.