Peak Oil or Peak Demand?
Following the dawn of the oil industry in the 1800s, demand for oil steadily grew. Initially driven by demand for kerosene as an illuminant, the world’s thirst for oil accelerated with the mass adoption of the internal combustion engine.
But the demise of the oil industry has been predicted throughout its history. A 1909 newspaper article from Titusville, PA—where the U.S. oil rush began—contained predictions by the United States Geological Survey that petroleum supplies would be exhausted within 30 years. But the oil industry instead simply moved west.
Subsequent predictions came and went. The most famous peak oil prediction was from Shell geophysicist M. King Hubbert. In a 1956 paper, Nuclear Energy and the Fossil Fuels, Hubbert suggested that oil production in a region would approximate a bell curve, increasing exponentially during the early stages of production, reaching a peak when approximately half of a field had been extracted, and then going into terminal production decline.
Hubbert is credited with accurately predicting the peak of U.S. oil production in 1970, but the truth is more nuanced.
In his 1956 paper, Hubbert estimated the ultimate potential reserve of the Lower 48 U.S. states and offshore areas at 150 billion barrels of oil. He then calculated that U.S. oil production would peak in 1965.
Hubbert’s 1970 prediction was a contingency case. This prediction would require U.S. reserves to be 200 billion barrels, but he noted skeptically that this would imply a yet-to-be discovered "amount equal to eight East Texas oil fields."
U.S. oil production did initially peak in 1970, albeit at a production rate nearly 20% higher than Hubbert predicted. Hubbert also projected that the global peak in crude oil production would occur around the year 2000 at 34 million barrels per day (MMbpd). But crude oil production in 2000 was more than twice as high at about 75 MMbpd.
Defying Hubbert’s predictions, global oil production has risen by 18 MMbpd since 2000, setting record highs in each of the past eight years. In the past five years, annual oil demand growth has risen at nearly 1.3 MMbpd each year.
As peak oil interest faded, a new hypothesis began to take its place. This new idea was that oil production would indeed fall, but it would be induced by falling demand instead of falling supplies. The consequences of this “peak demand” scenario were quite different from the peak oil scenario.
A peak oil scenario implies much higher oil prices as supplies struggle to keep up with demand. A peak demand situation, on the other hand, means plunging oil prices as the world economy simply transitions to another form of energy. The rapid global growth of electric vehicles (EV) are a primary driver leading to peak oil demand.
The idea that oil demand will peak within the next decade or so has become widely accepted, even with major oil companies. BP has forecast a peak in oil demand in the late 2030s, while Shell has suggested it could happen as early as 2025.
Global quality assurance and risk management company, DNV GL, predicted in its 2018 Energy Transition Outlook that oil demand would peak in 2023, which it sees being driven by “a shift to battery or hydrogen fuel-cell vehicles in domestic and commercial transport, and the increased efficiency of next-generation combustion engines”.
More likely, in my view, is that global oil consumption will continue growing for at least another decade, before finally slowing due to fuel economy gains and competition from electric vehicles.
One thing all these outlooks have in common is the implication that oil demand will continue to rise - perhaps significantly - from today’s level. As a result, and because of depletion in existing fields, these reports all agree that the oil industry will remain vital, and that substantial investments in the oil industry are still needed.
Otherwise, a widespread belief in peak demand could lead to underinvestment in the oil sector, leading to shortages and price spikes ahead of the arrival of peak demand.
WHAT DO YOU THINK?
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