Why Would Oil Demand Peak, Contrary to Peak Oil Supply?



Why Would Oil Demand Peak, Contrary to Peak Oil Supply?
People find it hard to believe that there is another side of the 'Peak Oil Supply' theory, which is 'Peak Oil Demand'.

The oil industry is quite familiar with the concept of a “Peak Oil Supply” but people find it hard to believe that there is another side of the theory, which is “Peak Oil Demand”. This article will examine why the concept of peak oil supply failed to materialize and why one should believe the concept of peak oil demand will materialize.

Peak Oil Supply Theory

Going back in history, the term “peak oil” was originally coined in the 1950s by M. King Hubbert who predicted that the US oil production would peak in 1970, and decline at the same rate as it arose. But in the history of the petroleum era, Matt Simmons will be remembered for calling attention to peak oil.

In reality, whenever oil prices abnormally elevate (1973, 1979, 2005, 2007, 2008, and then 2009-2014) due to a variety of reasons, the world often panics. Suddenly, the press is filled with articles regarding the shortage of oil (peak oil) and that oil prices will increase to $150 to 200/bbl. When oil prices collapse, the concept remains on the back burner.

The question that arises is, how come the peak oil supplies did not materialize in the first place? The simple answer is that the peak oil supplies theory was based on assumptions that no improvement in technology will take place over time.

The world is better off today than it was in the 1950s, contrary to the predictions of Peak Oil. The speedy technological advancements in 3-D, horizontal drilling, fracking and multi-completion has challenged the concept of Peak Oil. Since the middle of 2014, oil prices have been falling and reached $30 in January 2016, and are now hovering around $50/bbl. One obvious reason for this is the US shale oil and shale gas boom. We have witnessed a new supply stream that was previously locked under the huge shale basins around the world due to very low permeability, but is now available to meet global oil demand. The unlocking of these huge shale oil and gas and conventional discoveries in new frontier basins was possible due to technological advancements â horizontal drilling and fracking techniques. No one is talking about the peak oil supplies; rather, there is a debate going on as to when oil demand will peak.

Peak Oil Demand Theory

Contrary to peak oil supplies, peak oil demand is based on the assumptions of continuous technological improvements. It is also based on the fact that technological advancements are not only taking place in oil and gas industry, but also rapidly improving in other competing sources of energies like renewables.  

Additionally, drastic structural changes in the auto-industry will hamper oil demand. Electric vehicles will be replacing ICEs. The vast availability of autonomous electric taxis will reduce the need to own personalized vehicles. According to a study done by Tony Seba, global oil demand will peak at 100 million barrels per day by 2020, dropping to 70 million barrels per day by 2030. An article published by Andreas and Salman (Wake up call for oil companies: electric vehicles will deflate oil demand) forecasts that EV’s will displace about 14 MMbd under reference case and 39 MMbd under high case in 2040.

Oil demand already peaked in North America in 2005 and Europe & Eurasia in 1979. Therefore, one argument against peak oil demand is that the fastest growing economies will need more energy, such as China, India and other emerging economies. This is why the concept of peak oil demand may never really happen, even beyond 2050. Such advocacy is based on the premises that these countries will do nothing to address the environmental issues and to honor their commitments to the Paris Accord.

Why would oil demand will peak?

In our opinion, oil demand will peak due to environmental commitments, the transformation of auto-industry and penetration of renewables.

Renewables and Cost

At the end of 2016, cumulative global wind power generation capacity increased to 486 gigawatts (GW), up from 24 GW in 2001. The substantial growth in renewable energy is associated with improvements in technology and falling cost. China’s wind energy capacity increased to 168 GW in 2016 up from 7 GW in 2007.

Solar capacity also increased to 200 GW in 2015 and within the next 4 years, BSW-Solar expects global solar PV capacity will more than double. According to BNEF, by the 2030s, wind and solar will be the cheapest forms of electricity in most of the world.

One ongoing initiative that will push peak oil demand realization is the push for electric vehicles. France & UK will ban all petrol and diesel vehicle by 2040 in favor of EVs and hybrid vehicles while Volvo is phasing out cars that every new model launched from 2019 will be an electric. Similar initiatives have been taken by other automakers. Electric vehicle sales in China jumped 70 percent last year.

The peak oil supplies never occurred due to the dynamic nature of oil and gas industry and continuous advancements in technology. The world in 2017 is much better than the one in 1950s. Both oil and natural gas reserves and life expectancy have improved despite substantial increases in production and consumption. Horizontal drilling, 3-D, multi-completion and hydraulic fracturing allow the recovery of oil and natural gas resources (shale, coal bed methane, and tight formations) which otherwise were uneconomical to produce.

On the other hand, “Peak Oil Demand” will likely to happen during the next 10-15 years, driven by continuous improvements in technology in renewable sources of energy, penetration of EVs, autonomous vehicles, energy efficiency, and environmental pressure of the Paris accord. There is no doubt that like coal, oil demand would peak, but there is a diversion of opinion about its timing. Some believe that peak oil demand may hit in 2025, others believe in 2040, while others think that even it may not hit beyond 2050.

We have used the forecast highlighted in the paper “Wake up call for oil companies: electric vehicles will deflate oil demand” and used EIA reference case (IEO-2016) and the IEA 2015 current policies global oil demand forecast highlighted in “Should oil companies reconsider long-term upstream investment?” Both the agencies have predicted that global oil demand in 2040 is expected to reach about 121 MMbd, suggesting peak oil demand may not occur until at least 2040. Two possible scenarios are highlighted in the following graph.

In the reference case, due to penetration on EV, hybrid, fuel cells and autonomous vehicles expected to displace 13.8 MMbd, oil demand will peak in 2035. In the high case, auto-industry is expected to displace about 39 MMbd in 2040, and peak is expected to take place in 2025.

Peak oil demand is, therefore, quite possible to occur before 2030. Oil companies who are still betting on oil demand to grow beyond 2050 need to reassess their investment strategy.

Dr. Salman Ghouri is an oil and gas industry advisor with expertise in long-term forecasting, macroeconomic analysis and market assessments.

Daniyal Habib, J.D, Indian University Robert H. Mckinney School of Law.



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