The Case for “Peak Demand”

Reality has debunked the idea of “peak oil,” which says that the supply of oil is running low. It isn’t.  Indeed, proved reserves of oil continue to grow, from 1,400 billion barrels in 2004 to 1,700 billion barrels at the end of 2014. But the more interesting question has to do with the demand side. Specifically, is the world about to see the end of the link between economic growth and rising demand for oil? For the past century, that relationship has been as certain as death and taxes, but  unlike those two pesky inevitabilities, the future for oil is not nearly as certain. The term analysts use is “peak demand” and the question they are asking is whether trends in technology, policies, and political risk might slow down the oil train.

I think they may be onto something. Just because a trend is enduring does not make it permanent, after all; things work until they don’t. And there are reasons to believe that the trend curve could bend.  Here are four big ones:

Energy intensity is improving:  Oil is used predominantly for transport; steadily higher mileage standards for cars and trucks in China, Europe, Japan, and the United States are reducing the use of oil per mile travelled. That alone could reduce consumption by 3.8 million barrels a day, according to a 2013 report by Citibank (total demand is about 91 million barrels). Yes, it’s true as poorer countries get a bit richer, oil consumption goes up as people buy cars. But then as they transition toward more service-oriented economic activity, the rate of oil consumption peaks and then begins to decline. We are seeing this in China right now; moreover, considering the possible effects of efficiency, substitution, and public concerns about climate change, this trajectory is by no means inevitable. In other words, the oil peak could come sooner in emerging economies, and drop faster.

The economics are more rational: When oil prices fell sharply in 2014, many governments were emboldened to either eliminate or reduce oil subsidies. When prices recover, consumers will not be quite as profligate in their use of oil as when they were not paying the full price. It’s also worth noting that markets that use oil for power are actively exploring alternatives. Saudi Arabia, in particular, is beginning to invest big-time in other power sources, including renewables. Oman is building a huge solar plant to extract oil. On the other hand, of course,  if prices stay low, that could push up consumption, as it appears to be doing in the United States, where sales of SUVs have jumped. But the odds are not good on a future of $59 oil.

Natural gas is replacing the use of oil: This is true even in transport, where theglobal natural-gas  fleet has been growing 20 percent to 25 percent a year. Liquefied natural gas is competing with bunker fuel for shipping and diesel for trucks; in China, for example, demand for diesel fell in 2013 and 2014, largely for this reason. Many cities, including New York, Hong Kong, London and most of Japan, are encouraging their taxi fleets to convert to natural gas; a fifth of the US bus fleet runs on gas and 40 percent of garbage haulers. Gas could also replace oil in the petrochemical industry, which uses about 9 million barrels a day.

New technologies bring efficiencies:  The effects of this are more speculative, but there is no denying that the sharing economy is on the rise, which could make the use of cars and taxis more efficient. In addition, the use of IT and big data could help drivers skirt traffic jams, thus saving fuel.  Manufacturing, aviation, trucking, and rail could all be made more efficient through such applications.

The idea that demand for oil could peak should not be that shocking because it has in fact happened in specific markets. For example, the use of oil in the United States was at its highest in 2007; even with the economic recovery, demand has not returned to that level. The EIA, in fact, predicts that demand will fall further, by up to 2.7 million barrels by 2035. Europe has seen a similar trajectory, starting sooner and going deeper. So it is hardly implausible that as other economies mature, they too will figure out how to live with less oil—and perhaps do so faster as they learn from the experiences, good and bad, of markets that developed first. Already, while China’s demand for oil continued to rise in 2014, it did so by much less than before. In effect, China is using less oil per dollar of GDP. 

For the moment at least, Big Oil does not seem much concerned. In Exxon’s recent analysis of energy to 2040, the term “peak demand” is not featured once in 76 pages, and with a growing middle class buying more and more cars, now is probably not the right time to short the majors. Still, the idea of peak demand cannot be dismissed.

Amy Myers Jaffe, a well-regarded energy specialist at the University of California, and chair of the Future of Oil and Gas panel at the World Economic Forum, speculated that  “oil demand will peak within the next two decades.”  Obviously, we will not know for two decades whether she is right. But we do know that the first three items I describe above are impossible to argue with because they are all already occurring and the last looks promising.

 The factor that could make things move much faster is not yet much in evidence, and that has to do with whether  cars and trucks ever find a different way of getting moving—meaning something like electric or fuel-cell vehicles. For all the hoopla about Tesla, it expects to deliver only about 55,000 vehicles in 2105, barely a rounding error in the context of global car sales (85 million in 2014). But if an economical and convenient alternative to the oil-powered internal combustion engine emerges, it might not be just the end of peak oil, but pretty much the end of oil.