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Why Oil Prices Will Keep Moving Up

With oil smashing through two-year…

Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Are Supermajors Spooked By Peak Oil Demand?

Pipeline

Will the world’s appetite for crude oil ever be sated? For decades, it was widely presumed that demand for petroleum would grow steadily in line with the expansion of the global economy, as more people drove, more cities were built and more energy was needed to fuel industrial expansion. But a number of major energy companies now believe peak demand to be just around the corner, and are preparing to meet it head-on.

At the International Economic Forum in St. Petersburg, BP CEO Bob Dudley was asked when peak oil demand would be reached. He quoted a precise date: June 2, 2042. The company’s annual Energy Outlook estimates demand for crude will max out in the next twenty-five to thirty years. The most important factors affecting peak demand include global GDP growth (stronger economies mean higher energy demand), the pace of climate policy and expansion of electric vehicles (EV), many of which will rely on power-plants fueled by natural gas or renewables.

While BP noted peak oil demand “will be symbolic of a world transitioning away from oil,” it would only be the first sign of such a shift: “Oil is likely to remain a significant source of global energy consumption for many decades.”

Other energy majors share BP’s assessment. Total SA has predicted demand will peak in the early 2040s, and has been investing heavily in solar power to compensate for future sluggishness in the petroleum sector. Royal Dutch/Shell and Exxon Mobil have each invested in natural gas and LNG, for which demand is likely to increase, in order to hedge against the expected drop in crude demand, though Exxon has been publicly skeptical of the dangers of peak demand.

Shell is re-positioning itself as primarily a natural gas company, having spent $52 billion to acquire BG Group in early 2016. The company more recently has increased investments in renewable energy. Yet Shell still has billions invested in traditional crude, and could suffer with the rest of the industry if demand peaks sooner than expected. Related: The Biggest Obstacles For China’s $900 Billion Silk Road

A report from the Carbon Tracker Initiative notes that some $2.3 trillion has been spent on projects which, if prices slump along with demand, will supply oil nobody needs or wants. Certain companies, including ExxonMobil, are highly vulnerable to scenarios where peak demand comes sooner rather than later, while Chevron, ENI and Shell have invested thirty to forty percent of their capital expenditure in projects that will be useless if demand slows down.

If concerns around peak oil demand grow, it could further depress prices and render existing reserves unprofitable. The massive, high-profile exodus of major companies from the Canadian tar sands in 2016 and 2017 may be the first step in a transition to more flexible investments, like US shale and natural gas, for which demand will remain high.

It would be an exaggeration to say that peak oil demand has everyone spooked. Skeptics of the EV trend feel demand for electric cars won’t be quite as explosive as its proponents, including Tesla CEO Elon Musk, would have consumers think. Others point to the fact that oil demand has grown steadily, at more than 1 million bpd per year, for thirty years; the BP Statistical Review showed demand was up in 2016 by 1.6 million bpd, while demand has grown by at least 1.4 million bpd per year for the last five years. The expansion of the world’s EV fleet will stunt demand growth, but not enough to offset the natural increase in demand from global economic growth.

A key point of the peak oil demand argument is that the current bout of low prices will endure as demand slows down. As the market becomes more bearish, in light of OPEC’s failure to offset rising inventories with production cuts, and prices linger in the low $40s, that argument starts to look more persuasive. But not everyone is convinced, as bulls note slower investment in future production since 2014 and the current wave of divestments could mean much lower supply in the next decade, sending prices back up again. Geopolitical risk, particularly in the Persian Gulf and Venezuela, could trigger a supply cut and $100/barrel. Related: Underperforming Energy Sector May Soon See M&A Wave

The International Energy Agency predicts growing consumption and higher prices before 2040. Exxon feels the same way, despite its hedging and vulnerability to wasted investments, while major state-run companies in Saudi Arabia and Russia don’t see demand diminishing until after 2050.

Whether demand peaks sooner than expected rests on trends in global economic growth, vigor in the renewable energy sector and the expansion of EVs. It’s very possible consumption will increase faster than predicted, and that all this talk of peak oil demand is premature. Despite the uncertainty, major international energy companies, for whom peak oil demand is an existential threat, are gradually positioning themselves to face the new threat, should it appear sooner rather than later.

By Gregory Brew for Oilprice.com

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  • anton on July 13 2017 said:
    There is no peak oil demand as the components needed for other energy sources require oil throughout the mining, manufacturing, and delivery process.
  • Josh Gregner on July 13 2017 said:
    I'm amazed that people still think of peak-oil beyond 2040: India wants to prohibit fuel driven cars in 2030, China is introducing an 8% EV quota on 1. January 2018 (the quota will be growing significantly over the coming years).

    Where should all this demand come from? Demand growth over the past years was driven by China & India while OECD countries contracted.

    I get the point of needing to replenish the decline of existing oil fields. But that's certainly not a short-term issue. I believe that oil demand will globally contract. I'm uncertain if it will collapse quicker than the natural rate of decline of oil fields - that remains to be seen. But I think we are talking of years, rather than decades for this to play out.
  • TM on July 13 2017 said:
    Anton, you don't seem to understand the most basic economic laws. It's obvious that oil will always be used through different stages of industrial processes. But that's entirely irrelevant for most oil producers, because once oil is no longer used for transportation (or its use becomes substantially lower), there will be a major imbalance between a huge supply that will not find enough customers, and an existing but much lower demand. Once that happens, oil prices will completely sink and the rentier states and companies whose existence is based on it will collapse. That's the point. And the best proof that this will eventually happen is the desperate Saudi ARAMCO IPO. They wouldn't be selling if they didn't think this is around the corner (a few years ahead, of course, but still around the corner).
  • Mark Battey on July 13 2017 said:
    China and India have the sort of air quality issues that caused the USA to pass the Clean Air and Water Acts.
    The people in their major cities are highly and personally motivated about air quality and the Chinese are mandating their auto makers produce electric cars.

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