The Fuse

Still Too Soon to Say Peak Oil Demand Is Right Around the Corner

by Matt Piotrowski | October 18, 2016

Last decade, worries about peak oil supply were in fashion. The world was allegedly reaching a tipping point at which crude oil supply would plateau, and then decline. This sentiment led to a sharp rise in oil prices all along the futures curve and motivated governments to take efforts to plan for a possible supply crisis. Critics countered by arguing that while supply may eventually peak, global oil demand would reach its high point first. A combination of persistently high oil prices, widespread regulations on fuel economy, and a transition to alternative transportation fuels like electricity would undermine growth in consumption.

The outlook on the supply side has changed significantly. Oil production is nowhere near peaking. The shale revolution in the U.S., along with other patches of supply growth, has drowned out peak oil supply voices from the current conversation. On the demand side, talk of it peaking is still in fashion, however, as visible changes in the transportation sector have occurred in the past decade. However, although shifts are taking place with electric vehicles (EVs), autonomy, and more stringent fuel economy, it is not inevitable that we’ll soon be in a post-oil world and that demand will peak sooner rather than later.

Although shifts are taking place with electric vehicles (EVs), autonomy, and more stringent fuel economy, it is not inevitable that we’ll shortly be in a post-oil world and that demand will peak sooner rather than later.

The World Energy Council, in a report released Monday, sketched out three plausible scenarios for the future of energy supply and demand, with two of them seeing oil demand peaking before 2030. In these cases, besides moderation in population and economic growth, changes such as cheaper renewable energy such as solar, rapid penetration of electric vehicles, and more stringent fuel economy standards all conspire to cause demand to peak.

The Council calls one of these scenarios “Modern Jazz,” which sees an innovative world with disruption that spurs market-driven changes. The forecast has demand reaching 103 mbd by 2030 before falling. “Funding from venture capitalists, crowd-funding and other private investors enables continued breakthrough technological research that creates new markets and reshapes traditional economic models,” the report said.

The authors add: “Technology developments that disrupt traditional energy systems boost efficiency,” pointing out that shifts in consumer choices such as greater acceptance of EVs and increased telecommuting will “drastically” slow oil demand beyond 2030.

For “Unfinished Symphony,” which envisions a world where policies accelerate a low-carbon future, demand plateaus just slightly above current levels, growing at a modest rate before declining at 2030. In other words, this scenario lays out a world in which top-down mandates significantly restrict carbon and as a result energy demand. “Policy mandates substantially impact consumer demand for light-duty vehicles: Car-ownership grows at a moderated pace, and the mix of car technologies is highly diverse, including biofuels, EVs, and natural gas,” the Council said.

In the “Hard Rock,” business-as-usual scenario, transportation, similar to today’s world, is dominated by oil, so peak demand doesn’t occur until 2040, when it plateaus for a decade.

The business-as-usual scenario, dubbed “Hard Rock” after a quote from heavy metal singer Alice Cooper, envisions a fragmented political system and a world where climate initiatives aren’t at the top of the list. Transportation, similar to today’s world, is dominated by oil, so peak demand doesn’t occur until 2040, when it plateaus for a decade.

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With oil having a monopoly on the transportation sector, it’s clear that either strong government policies or a major technology disruption will be needed in order to alter the projected path for oil demand and spur greater diversity in the transport sector, as the “Jazz” and “Symphony” scenarios show. But how plausible these scenarios are is up in the air, meaning the “Hard Rock,” business-as-usual path may win out.

For peak demand to occur by 2030, or even 2040, a lot of different variables have to fall into place.

As such, peak demand scenarios have been too optimistic in the past, and this one might be too. For instance, in 2013, Citi Research put out a report that oil demand would hit its top by 2020. That analysis now looks woefully premature. The optimistic scenarios from the Council may end up missing the mark, too, given that demand trends are made up of numerous factors such as economic growth, population trends, consumer income, subsidy policies, engine technology, fuel economy, oil price volatility, and the performance of alternative fuel sources. With so many issues in flux, it’s difficult to pinpoint when exactly oil demand will plateau and then decline.

The current low price environment has stimulated oil consumption, making the task of curbing demand growth much harder now than it was last decade and the first part of the 2010s, when prices were above $100.

The current low price environment has stimulated oil consumption, making the task of curbing demand growth much harder now than it was last decade and the first part of the 2010s, when prices were above $100. Oil prices could stay low for a very long time: With the massive overhang of crude stocks, OPEC’s trajectory unclear, U.S. shale showing signs of returning, in addition to numerous other large sources of non-OPEC supply, the market is still far from rebalancing. This gives more economic incentive to increase consumption and shun alternatives.

Second, while fuel economy standards are a powerful tool to keep demand in check, they are a blunt instrument. In the U.S., for instance, fuel economy targets are being undermined by changes in the fleet mix—spurred by low oil prices. So far, there’s been an almost 30 percent gap between the original 2016 goals and what has actually been achieved. The 54.5 miles per gallon target for 2025 is simply a projection, and whether that goal is reached will depend on consumer preference. In the U.S., amid the current low price environment, sales for SUVs and bigger cars have soared, countering the objective of reducing fuel consumption through efficiency—gasoline demand could hit a record high this year. Long term, greater fuel economy can actually lead to increased driving, as motorists use their savings from more efficient vehicles to travel more. That, in turn, could boost demand for oil.

Third, populations in the non-OECD world are continuing to grow and need oil, which currently fuels 95 percent of the transportation sector globally, in order to boost their economies. While China’s demand growth is slowing, it will remain positive for years to come. The Energy Information Administration (EIA) sees consumption there rising by 1.7 percent per year through 2040. India is poised to see its demand increase by 3 percent per year, while economies in the Middle East and Central and South America will also experience growth. The increases in these parts of the world will occur alongside demand remaining flat in the OECD, meaning global demand is set to rise by almost 25 mbd to 119 mbd in the next two and a half decades.

In this context, when compared to other long-term outlooks, the Council’s scenario that projects the status quo into the long-term future seems a bit too conservative with its demand estimates. It sees petroleum demand rising by 1.2 percent per year, before falling to just 0.1 percent annually starting in 2030 amid lower economic growth. In all, demand peaks at 104 mbd by 2040, well under the EIA’s outlook.

EVs needed to spur transformation

Of course, the EIA projections could be well off the mark, as the agency’s long-term outlooks have been in the past. The EIA’s long-term outlook doesn’t take into account possible policy and technological shifts. The World Energy Council’s “Jazz” scenario sees a rapid penetration of electric vehicles, but so far, despite their growth this decade, they make up less than 1 percent of global vehicle sales. There is room to cheer given that EV sales in the U.S have hit records, more inroads are being made in Europe, and China is being aggressive in incentivizing them for consumers. Last year, the number of EVs on the road reached 1.26 million, up 100 times higher than at the beginning of the decade. Still, EVs are a niche market, and they could be for some time since it takes at least one to two decades to turn over a fleet.

The World Energy Council’s “Jazz” scenario sees a rapid penetration of electric vehicles, but so far, despite their growth this decade, they make up less than 1 percent of global vehicle sales.

The World Energy Council Energy’s “Jazz” outlook is indeed attractive: Oil would lose its monopoly on the transportation sector based on market forces spurring changes and consumers would have more choices. But there is still a barrier when it comes to consumer education, and low gasoline prices undermine the economic case for EVs. Against this backdrop, in order for the Council’s “Jazz” scenario to be realized, there needs to be an environment to allow for economic disruption along with smart and sustainable government policy.

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