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Peak oil? Sooner than you think

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EEnergyInformer

For some time, there has been speculation about when global oil demand may peak – not because we will run out of oil or prices will spike making oil unaffordable, notions that are now considered passé – but because we won’t be needing as much of the stuff as we thought we would. And once the peak is finally reached – whenever that is – demand will begin to drop thereafter, perhaps precipitously.

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What is radically different about the new thinking about oil demand is that price, while still an important factor, no longer seems as important as it used to be. As further described alternatives to oil are or will soon be cheaper making the price of oil far less significant.

Witness the fact that global oil has been growing at much slower clip in the last few years even though prices, hovering in the $40-60 range per barrel, have been at or near historical lows. The old theories that low oil prices result in robust demand growth may no longer apply – and that, of course, would be a radical departure from the historical norms.

In a report titled When will global oil demand peak? Rob West, an analyst at Redburn, an investment research and advisory service in the City of London points out that:

“Global oil demand grew +1.1Mbpd pa in the last decade. Peak demand is seen well beyond 2035 by BP, in 2040 by the IEA, in 2030 by McKinsey and in 2029 by OPEC. But at $55-60 oil, we argue demand can slow to <0.5Mbpd pa from 2020 and peak in 2026.”

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West identifies 5 major trends, all contributing to intensified market competition and – one might add – potentially devastating consequences for the oil majors:

  • Alternatives to oil, especially in the critical transportation sector, will make oil vulnerable to behavioral and technological disruptions (table above);
  • Electric vehicles – increasingly charged from renewable sources – will begin to eat into internal combustion engine’s (ICE) dominant market share (Fig on page 8) – a trend that many expect will accelerate once EVs move mainstream and a charging infrastructure is in place;
  • Oil subsidies, once prevalent in many countries – are expected to dwindle or be phased out entirely as already witnessed in a number of countries (Fig below);rsz_screen_shot_2017-03-20_at_12538_pm
  • Cheap solar (Fig on page 7), wind and gas- fired generation will reduce oil demand in the global electric power sector; and
  • Travel demand will dwindle (Fig on page 7) due to aging population and the rise of “virtual travel.”

Much of Redburn’s narrative, of course, is not new. But this condensed 11 page report manages to bring the facts together and distill a powerful conclusion – namely a prediction that peak oil demand may be a reality much sooner than many in the mainstream are predicting – less than a decade away.

For example, there is little disagreement that oil subsidies, once prevalent in many rich and even few non-rich OPEC countries, are being reduced and/or gradually phased out in Saudi Arabia, Indonesia, Mexico, Egypt, Iran – to name a few.

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Or the use of oil in power generation. In much of the OECD, it is a thing of the past. The same is likely to happen globally.

With the price of renewables continually falling, they will increasingly be cost competitive with conventional fossil fuel sources. The table on page 6 illustrates the point. Why bother with alternatives when solar generation can be had for around 2-3 cents/kWh.

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Among Redburn’s interesting insights is the dwindling road travel, which it attributes to a number of factors, including demographic & “growing digital connectivity.” It says:

“Miles travelled per person are falling 0.7% pa in the UK (2005-15) and -0.6% in the US (2004-14). One reason is aging populations, with 14% over 65 in the OECD in 2006, rising to 16.6% in 2016, accelerating to c20% in 2026. Another nascent trend is “virtual travel”, with greater Internet purchasing and the advent of ‘virtual reality’ (e.g., the Oculus Rift).”

In describing the phenomenon, Reburn report points out:

“Due to the launch of VR technologies, which are in their infancy today – e.g., the Occulus Rift, the Samsung Gear, HTC Vive – we would expect disruption to travel from digitization to accelerate in the next decade.”

When Facebook purchased Oculus in 2014, Mark Zuckerberg highlighted an ambition to disrupt travel:

“After games, we’re going to make Oculus a platform for many other experiences. Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face – just by putting on goggles in your home.” In the US, regular home working has doubled since 2005. 2.5% of the labor force works from home at least half the time. Harvard Business Review describes 13.5% productivity gains from working remotely, plus cost savings of $11,000 per person and a 50% lower likelihood of quitting one’s job. Penn State researchers even found ‘remote workers’ more alert and attentive, attributed to getting 1-hour more sleep per week and not commuting. So if you are reading this note in the office, go home immediately… ,” West advises.

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Regarding electric vehicles, Redburn is simply following what many others have been saying. Some experts are far more ambitious, others less so. And the bottom line is that nobody really knows.

“Finally, the variable intentionally left for last,because it is both the most important and the most uncertain, is the penetration of electric vehicles. As background, the average fuel economy of the average US passenger car has improved at c2.5% pa since 2006, coinciding with the period of high oil prices. Car makers are also focused on continuing to improve vehicle fleet efficiency, so this trend may continue. But the new element is the advent of the “electric car”, with some commentators calling for a total replacement of internal combustion engines with electric vehicles as early as 2030.”

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In trying to quantify the impact of EVs on oil demand Redburn says:

“The global passenger fleet rose by 3.5% pa in the past decade, explaining 0.4Mbpd pa of overall demand growth for gasoline and 0.8Mbpd pa demand growth for road-transportation fuels. If future growth in transportation fuel demand is diluted by EVs’ share of net future vehicle sales (new purchases minus retirements), then:

EVs will be displacing c0.1Mbpd of annual demand growth in 2020, 0.3Mbpd in 2025 and 0.7Mbpd in 2030.

Cumulatively, that would destroy 0.3Mbpd of oil demand in 2020, 1.2Mbpd by 2025 and 3.8Mbpd by 2030.”

“Given the exponential adoption curves … it may not be surprising that the impact of electric vehicles on global oil demand increases every year.”

Having examined the 5 critical trends, Redburn comes back to Economics 101: the impact of price of oil on near term demand.

“Back in the real world, the most important variable for near-term oil demand is likely to be the oil price. For instance, when we measure the driving activity across 120 of the world’s toll-roads, spread across the planet, we find a perfect correlation between the rate of driving growth and the YoY oil price. As oil prices collapsed from c$110/bbl in mid-2014 to c$50/bbl in the trailing 12 months, the rate of driving growth accelerated from c3.8% to c5.1%. Given that road travel comprises around c40Mbpd of the world’s oil demand, a 1.3% acceleration in growth should, all-else equal, be adding c0.5Mbpd to the rate of global oil demand growth. Indeed, global oil demand growth did accelerate from 1.3Mbpd in 2012-14 to 1.8Mbpd in 2015-16 (2.1Mbpd in 2015 and 1.6Mbpd in 2016), reflecting elasticity.”

Redburn’s main message is that global oil demand will likely peak around 2026, and that would be without any major inflection in technology. If one assumes an inflection point for electric vehicles (EVs), autonomous EVs (AEVs), solar, energy, storage or other, then the peak may come even sooner.

What are we to make of this and others who are predicting peak oil demand? Rob West, a partner in oil & energy research at Redburn believes that given the evidence presented, the implications for oil majors is rather unambiguous. Peak oil demand is coming, it may happen sooner than many expect, and once it
arrives, demand for oil may begin to drop –possibly precipitously – something few oil majors have given much thought to in the past.

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That may begin to change, even though the Trump Administration has proposed to nix the US automobile mileage efficiency standards put in place by the Obama Administration.

Perry Sioshansi is president of Menlo Energy Economics, a consultancy based in San Francisco, CA and editor/publisher of EEnergy Informer, a monthly newsletter with international circulation. He can be reached at [email protected]

  

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  • Just_Chris

    Oil peaked as predicted in the 1970’s in the early 2000’s. Increases since then have been due to the growth of unconventional oil. Stuff that wasn’t considered economic in the 1970’s that changed the game completely, oil companies thought that as light sweet crude dropped off they could just increase the price, their profits would continue to rise and everyone would keep buying oil. Everything changed in 2008, no one really knows what is going to happen next. Least of all me but what I can see is a lot of replacements for gas and oil within spitting distance on cost of oil. If it spikes, demand will crash and may never come back. Same with thermal coal. All safe bets, IMO, are off.

  • trackdaze

    OECD oil use is already in decline. It won’t be long until the new world growth tapers and its efficiency standards and rapid uptake of evs has the world peak much much sooner.

    Raising capital for a 20year oil gas project when the financiers know its begun structural decline.

  • Miles Harding

    Or maybe sooner than we would like?

    So far, the disruptive changes haven’t made much of a dent on world oil consumption, which is currently rising at just short of 100M barrel per day. A believable estimate of the next 20 years is very difficult to obtain, they are typically coloured by business or political interests, but a concensus seems to indicate a continued slow rise in oil consumption to at least 2030, but with a decreased market share, or in other words exponential growth will continue.

    When we consider the scale of oil consumption, passenger vehicles will only make a small contribution to demand destruction (< 1%), it is unlikely to make a big difference to the balance. This helps to illustrate the enormity of the oil dependency problem.

    Phaseout of oil subsidies in countries like Saudi Arabia are the stuff revolutions are made of, so it's not clear that they will be able to do this to a large degree. More worrying is the amount of oil available for export as the super-giant fieds decline and the still increasing population demands more of the available oil, eventually bankrupting the Saudi economy. Likely the wheels will fall off before the limit is reached as subsidies for fuel and, more importantly, food are necessarily curtailed. Venezuela is living though this now.

    Steven Kopits' analysis suggests that oil demand is inelastic and that price will rise steeply when demand outstrips supply by only one or two percent, as was the case in 2007. It would seem to me that we have two or more likely causes in the inevitable Saudi Ghawar field decline and US domestic shale oil production decline due to well decline rates overtaking new drilling capacity.
    In 2007, the world demonstrated it had limits to oil price and economies would break. Conversely, 2015 demonstrated the flip side when oil suply exceeded demand by only about 1%.

    I would be surprised if the geology allows oil supply to plateau at this level for very many years, suggesting that we may soon find ourselves in a shortfall situation again.

    The 'peak' I am really interested in is actually the point at which declining (or stable) supply diverges from underlying demand, creating a shortfall that can't be accomodated. Clearly, anythng that can destroy demand by displacing it will be welcome, but will it be sufficient to allow demand to track supply as it inevitably declines?

    • Robin_Harrison

      The Saudis are well prepared. Their minister for oil forecast the end of the fossil fuel age publicly in 2000. He said the stone age didn’t end because we ran out of stone. They were behind the oil price drop too because, with the cheapest to extract oil, they wanted the majority of theirs out of the ground and sold by then.
      I agree with the author. This transition is happening a lot faster than people think and I take your point, if the demand drops precipitously and the major oil companies decline there could be a potentially dangerous lag as the alternatives catch up. Their products will still be needed by the plastics industry so that may cushion the shock for them.

  • Anders Arne

    The eyes should be focused towards China in the next 5 years. Their extreme ambitions towards renewable and EVs. If China achieves it’s ambitions peak oil will occur even before 2026.

    I see that the table depicting EVs percent of global vehicles sales shows about 2,5% market share in 2020. China has plans to have 5 million EVs on the roads by 2020, which they will most likely meet with at good margin. Indicating that 4 million EVs must be sold in 2018 and 2019. On top of that you have Tesla with about a million a year in sales by 2020. And then we have not even startet to talk about the rest of the car manufactures.

    EV sales are more likely to be somewhere between 5-10% of total sales by 2020. It is a result of an extreme fall in EV prices and a natural increase in demand.

    People want EVs because it is better and cheaper. No one returns to a fossil fuel car after an EV ownership.

  • Radbug

    I’m waiting for the electric Vespa. You overlook another reason to buy EV’s, namely, riding two wheelers has damaged my hearing and EV’s are quiet.

    • newnodm

      There are no electric Vespa-like scooters? Or do you insist on an actual Vespa?

      • Radbug

        Oh, pleeease, Newnodm, I wouldn’t be seen dead on anything other than a colour-coordinated Vespa!

  • Just_Chris

    There is a lot of discussion around dropping oil demand caused by EV’s. IMO chnages caused by EV’s will be seen a mile off. If we look at Norway they are now selling on average about 20-25% of their new cars with a plug and have been for about 12-18 months – this is a massive uptake, bigger than I could imagine happening in any other major auto-market. This has not resulted in massive drops in Norway’s oil consumption because cars are not replaced on a yearly basis. The national fleet of cars in Norway is still made up of less than 5% EV’s.

    Having said that about 2/3 of oil is used in transport so small changes in this sector will make a big difference overall and only a 1-2% drop in demand has a big effect on price. I am just not sure that it will have such a dramatic effect on consumption.

    The peak oil prediction is really interesting though as there is a lot of pressure on oil consumption. Even things like solar/battery systems are starting to eat into off grid and Island diesel consumption.

  • sbean

    Demand destruction will occur much more due to unaffordability, not the switch to electric vehicles, which will continue to be for the wealthy few for the foreseeable future. Deleveraging of private debt such as auto loans, student loans, mortgages, and the follow-on effects on the broader economy such as business closures and corporate bankruptcies along with spreading unemployment is the path ahead. (Note: lower price doesn’t necessarily imply affordability, as in the scenario I’ve presented.)