A brief look at the case for Peak Oil Demand
Around 2008 there was much discussion on the possibility that the world was approaching what is commonly referred to as peak oil. A term that refers to a peak in global oil production. Oil prices (WTI crude) had risen from around USD 10 per barrel in late 1998 to a peak of USD 147 in July 2008 (WTI crude). An increase of almost 15 times in less than 10 years. At the time, oil demand was starting to exceed available supplies as the global economy was growing strongly. Then the GFC arrived and demand, along with prices, started to fall.
However, the oil sector and oil demand managed to recover. This was thanks to a combination of artificially low interest rates being implemented worldwide by central banks and eager investors looking to find the next booming sector. Prices rebounded to a range of USD 80 to USD 100 per barrel for a number of years. The oil producers were provided with two key “ingredients” which enabled the continued increase in production: Ultra cheap credit and an investment landscape desperately searching for any investment that could provide a positive yield, in this historically low interest rate environment.
Recently the term peak oil, rather than referring solely to a peak in production, is being increasingly used to describe a potential new trend relating to the replacement of oil with renewable energy alternatives such as electric cars. This reduction in demand involves a scenario in which the world will be increasingly weaning itself off oil.
Oil demand and the electric vehicle
Some analysts and observers foresee peak oil demand as early as 2030 due to a rapid emergence of new electric cars, efficiency gains and other factors. While it is inevitable that we will see peak oil demand at some point in the future, what is often not fully recognised are the other potential driving forces that are more likely to result in the eventual peak in demand. While fully electric cars and hybrid vehicles are increasingly penetrating the world’s auto markets, they still only constitute a small fraction of new cars being sold and current cars in circulation.
According to recent data published by the IEA only 0.2% of all cars in circulation are EVs. This is despite widespread introduction of government financed incentives in many different countries which are making electric cars more competitive through various grants and tax breaks. It is likely to require many decades to replace the existing global fleet of petroleum vehicles with EVs to any meaningful degree. The electrification of the automobile fleet is also based on the assumption that the world has the required resources such as cobalt and lithium to satisfy future demand from battery producers (see separate blog post regarding the challenges with renewable energy).
The most probable catalyst for peak oil
The most likely catalyst for peak oil is a prolonged or permanent constriction in the availability of global credit and increasing difficulty in servicing both public and private debt. Such a credit constriction will trigger a contraction of economic activity and productivity. Since economic growth and energy demand are highly correlated, a severe economic contraction will reduce demand for energy including oil. If the global economy is unable to ever get back to the previous level of economic activity then oil demand is also unlikely to ever recover to its previous highs. Likewise, any significant constriction in global credit will seriously affect the oil industry as availability of capital for new oil developments and oil exploration is severely reduced.
Therefore, it will most likely be economic and financial circumstances which will trigger both peak oil demand and peak oil supply. Whatever turns out to be the main driving force behind a future downward trending global oil production only time will tell. Maybe it will be a persistent fall in demand with producers frantically adjusting their production to match the falling demand. Alternatively, it might be the oil industry which will be curtailing oil developments on such a large scale that even a downward trending oil demand will be insufficient to match a potential collapse in oil production. Most likely, it will be a combination of these factors which will be interchanging in a positive feedback loop: A global economic contraction reduces global oil demand. Falling oil demand results in a fall in oil prices. A fall in oil prices combined with reduced availability of capital results in a fall in oil production. Falling oil production leads to higher oil prices. Higher oil prices impact economic activity which reduces oil demand. Falling demand reduces oil prices again. Falling oil prices once again impact oil producers. And so on and so forth.
Any discussion about whether we will first see peak oil demand or a peak in supply is therefore largely irrelevant, as the two are interdependent and are likely to go hand in hand, once this probable future credit crisis eventually unfolds.