The oil debate battles on

Javier Blas writes in the Financial Times about how the debate peak oil has changed to a debate on peak demand as opposed to peak supply.  As Blas writes,  “it could presage a massive revolution, and much lower oil prices in the next two decades than currently anticipated by the energy market.”  This has been a major concern for commodities traders.  For those involved in sustainable energy issues, this is a welcome development.

Peak demand theory shakes up oil debate

Cheaper substitutes and fuel efficiencies will hit oil demand

Peak oil was a major area of debate in the energy market in the early 2000s. Now peak oil theory is back, although from a dramatically different point of view: rather than the peak in supply, discussions focus on the possibility of a peak in demand.

“The substitution of natural gas for oil combined with increasing fuel economy means oil demand is approaching a tipping point,” says Seth Kleinman, oil analyst at Citigroup, in a research paper provocatively titled “Global Oil Demand Growth – The End is Nigh.”

Citi’s research on oil demand is rather unconventional, going against the prevailing view among trading houses and, above oil, major oil companies. But if correct, it could presage a massive revolution, and much lower oil prices in the next two decades than currently anticipated by the energy market.

During the last decade, peak oil was a popular theory that said that oil supplies were about to peak, a major major factor behind the record oil prices of the period. The theory’s father was Marion King Hubbert, a geologist who worked for Shell who accurately predicted in 1956 that US oil production would peak between the late 1960s and early 1970s.

Others, including oil financier Mathew Simmons, took Mr Hubbert’s original work and extrapolated it for global oil supplies. However, the boom in US shale oil production – coupled with rising output in Iraq, Canada and Saudi Arabia – has left the theory about an imminent peak in global oil supplies looking a little premature.

Citi is now actually talking about peak oil for demand. The bank has built up three main scenarios: on its business as usual baseline, oil demand continues to grow until 2020, averaging a 1.2 per cent rise a year, slightly less than the 1.3 per cent of 2000-2010, but sill enough to lift oil consumption to roughly 98m barrels a day by the end of the decade, up from about 90m b/d now. But when the bank incorporates the impact of, first, fuel efficiencies in cars and trucks and, second, the shift in usage to cheaper natural gas, oil demand growth flattens, with consumption staying at less than 92m b/d from 2015 until 2020.

“Taken together, the improvement in global fleet efficiency and the substitution of natural gas for oil could be enough to put in a plateau for global oil demand by the end of this decade,” Mr Kleinman says.

Peak oil demand is a provocative theory and would rely on some unanswered questions being met: namely on the development of large-scale gas-fired trucks, rail and shipping vessels; the sustainability of the US shale boom; policy action to support improved fuel-mileage and to phase out oil subsidies.

It makes an important point, however: the current debate in the oil market and industry seems fixated around a single narrative. Broadly, the discussion gyrates around the need for higher-than-normal oil prices to bring forth enough supply to meet ever-rising demand.

The only issue left to debate is whether oil supply will growth fast enough, and what price level would be required. The narrative fits neatly with the events of the past decades, when oil supply growth struggled to meet a China-led boom in demand. But, as any financial analyst knows, past performance is not a guide for future performance. Maybe it is time to take a fresh look at the narrative.