The world’s largest oil companies are planning for the biggest shift in energy consumption since the Industrial Revolution since, after decades of growth, global demand for oil is poised to peak and fall in the coming years.
New technologies that improve fuel efficiency are starting to push down the amount fuel that’s needed for transportation, and a consensus is growing that fuel demand for passenger cars could fall as carbon rules go into effect, electric vehicles gain traction and the internal combustion engine gets re-engineered to be dramatically more efficient.
While most big oil companies foresee a day when the world will need less crude, timing when that peak in oil demand will materialise is one of the biggest challenges facing the energy industry. It’s tough to predict because changes to oil demand will hinge on future disruptive technologies.
Yet, for many companies and investors, the question isn’t whether this immense turning point will happen—it’s when. Getting that timing right will separate the winners from the losers, and it has become a major preoccupation for energy economists and a flash-point for controversy within the industry.
Much to consider for peak oil
Forecasts for peak oil demand diverge by decades. The Paris-based International Energy Agency argues that demand will grow, albeit slowly, past 2040. And the two biggest U.S. oil companies, Exxon Mobil and Chevron, say peak demand isn’t in sight.
But some of the biggest European producers predict that a peak could emerge as soon as 2025 or 2030, and they are overhauling their long-term investment plans to diversify away from crude oil. Royal Dutch Shell and Norway’s Statoil are placing bigger bets on natural gas and renewables, including wind and solar.
The uncertainty stems from a host of variables, including the pace of technological changes that will make renewables and electric vehicles more cost-competitive; the toughness of new regulations aimed at curbing greenhouse-gas emissions and climate change; and the rate of economic growth in developing countries, which is currently driving the increase in oil demand.
Those factors are making it much harder to predict long-term demand than in the past. And calling it accurately is high stakes for an industry sitting on trillions of dollars of crude-oil reserves. Whenever it finally does happen, the tipping point from global oil-demand growth to decline will reverberate through the energy world, knocking down oil prices and some companies’ shareholders.
Oil companies built their strategic plans around the assumption that they would always need to find more oil, and analysts obsessed over whether there would be enough crude in the ground to fuel growth. When oil hit its high over $147 a barrel in the summer of 2008, some of the run-up was fuelled by concern about hitting maximum output, or so-called peak oil, the point at which normal declines in output from producing oil fields outpace the industry’s ability to develop new supply.
The electric question
To predict how demand is likely to grow—or, eventually, shrink—companies are paying close attention to what most view as the momentum around the world behind regulations to limit greenhouse-gas emissions and combat rising temperatures.
Those measures include the adoption of higher prices on carbon in more-developed and developing countries along with efficiency gains and technological advances which are seen as likely to further limit growth in cars’ demand for gasoline.
Outside of efficiency gains, which even peak-demand naysayers acknowledge are coming, the biggest “X” factor is how widespread electric-vehicle adoption will be. Transport fuel accounts for about 50% of the demand for crude oil, with cars accounting for half of that; that means 25% of total oil demand hinges on autos.
For decades, Americans’ love of the open road, which made the country the largest oil user in the world, helped to drive global oil demand. But U.S. cars have gotten more efficient, due in part to government policies that mandate better mileage for every gallon of gasoline and diesel burned and that has slowed demand growth.
Peak oil, an event based on M. King Hubbert‘s theory, is the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline. Peak oil theory is based on the observed rise, peak, fall, and depletion of aggregate production rate in oil fields over time. It is often confused with oil depletion; however, peak oil is the point of maximum production, while depletion refers to a period of falling reserves and supply.
Electric vehicles, self-driving cars and ride-sharing stand to further erode gasoline demand. The question is, how fast? That depends on batteries, many say. Battery technology is still too rudimentary, and too expensive, for electric vehicles to take hold en masse. If engineers can’t crack the lighter, cheaper, denser battery challenge, then the peak-demand scenario slows.
But if a breakthrough in battery technology puts electric vehicles suddenly on a par with the cost of internal-combustion vehic les, or if carbon taxes in more countries are high enough to weigh on drivers, adoption rates could rise more quickly. That could shave millions more barrels a day off global oil demand. All of this means that varying predictions for electric-vehicle adoption drive a lot of the differences in forecasts.
The IEA’s main scenario shows oil demand from cars in 2040 remaining close to the 24 million barrels a day that is now consumed. That estimate, is a big reason for the agency’s prediction that crude-oil demand is likely to keep growing at least past 2040.
The IEA says that even if EVs gain more traction—and they’re doubt full that they will until batteries can last for several hundred miles—there’s still a lot of transportation with no electric alternative. Half of oil demand for transportation is driven not by passenger cars, but by jets and heavy-duty trucks.
Trucks in Asia alone are responsible for one-third of global demand growth and even if oil-demand growth from transportation wanes, the demand for oil in the petrochemical sector—to be used as a feed stock to generate more plastic items, from nappy’s to lightweight, fuel-efficient car parts—is still expected to increase.
Wood Mackenzie, an energy research firm, expects roughly 2% of global oil demand—or two million barrels a day—to be lost to electric vehicles by 2035.
And others see electric vehicles making significant inroads into oil demand. Statoil Chief Economist Eirik Wærness says expectations of higher electric-vehicle adoption are the main reason that his company’s peak-demand forecast of 2030 is earlier than BP’s. Statoil has shifted its long-term investment portfolio to reflect its forecast of demand peaking around 2030. The company plans to increase investment in renewables to between 15% and 20% of total investments.
The developing world
Why, then, does Statoil expect an early peak? The company sees increased demand balanced out by efforts in some developing countries to reduce greenhouse-gas emissions and limit climate change. In China, for instance, the government is subsidizing electric vehicles, and in cities, only EVs are allowed on the road on days when air quality is bad.
Such policies around the world stand to have a major impact on the fuel mix. Globally, carbon intensity and energy intensity have already peaked and will trend down through 2035, according to a Wood Mackenzie analysis. But many analysts say the Paris Agreement to limit global warming is just the beginning. And some companies are starting to plan accordingly.
Whether you think peak oil demand will come in the 2020’s, the 2030’s, or beyond, what is clear to everyone is that the future has to be low carbon.If you’ve found this blog helpful and would like other topics covered, please feel free to drop me an email with suggestions. You’re welcome to subscribe using ‘Subscribe to Blog via Email’ section and this will get you the latest posts straight to your inbox before they’re available anywhere else