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Page added on April 2, 2013
Peak demand theory shakes up oil debate
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 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.
11 Comments on "Peak demand theory shakes up oil debate"
Econ101 on Tue, 2nd Apr 2013 12:06 pm
The crack pot theory of peak oil was never correct. What caused the shortages was political actions taken by the US government. We have to remember the people of the world not only have the new shale reserves but the huge reserves on off-limit federal lands is still there. The only thing real about peak oil is politics.
Aceditor on Tue, 2nd Apr 2013 12:46 pm
Econ 101 – production has peaked in 30 countries. Tight oil will never be able to be produced at a rate to change that. It may slow the decline. Oil prices are global – if peak oil is hokum explain $100 a barrel.
Beery on Tue, 2nd Apr 2013 1:05 pm
Yet another article in the ‘peak demand’ propaganda blitz.
If peak demand exists, peak supply exists, which means peak oil is not only alive and well, but imminent.
MD on Tue, 2nd Apr 2013 1:20 pm
Peak oil demands we use oil differently than we did in the past. Peak oil IS peak demand. Two sides of the same coin!
DC on Tue, 2nd Apr 2013 2:20 pm
From a propaganda pov, ‘peak demand’ sounds much nicer than ‘peak oil’. Peak demand implies that the flat production\consumption has little to do with constrained supplies, but is due to ‘market forces’, ‘efficient gas-burners(LOL!) or some other plausible sounding nonsense. If spun correctly, peak demand can be made to sound like a totally natural, ‘market-driven’ phenomenon that has practically nothing to do with supply or high prices or depleting resources and so on. All of those messy issues can be side-stepped by invoking ‘peak demand’ to explain away any awkward questions that arise about our present predicament.
poaecdotcom on Tue, 2nd Apr 2013 2:31 pm
I only hope we get to peak BS soon.
Oil is used for 95% of the transport of our goods in our trade based paradigm. Any ‘peak demand’ argument directly implies peak economy.
“Maybe it is time to take a fresh look at the LAWS OF THERMODYNAMICS”
Norm on Tue, 2nd Apr 2013 3:06 pm
Good morning Econ101, hey if you drive in Nevada go down the Extra Terrestrial highway to Area 51, you would enjoy it and you can buy UFO burgers and fries when you get there.
Now for the rest of us …. yeah ‘peak in demand’ is a nut-case concept. However actually I buy into ‘demand destruction’. The price can only go so high, and each little household goes bankrupt and Mitt Romney takes back the empty house and the title, and those people are now living in grandpa’s crawlspace, and they don’t burn oil anymore. So instead of the oil price goin to infinity, the demand is reduced, its ‘demand destruction’ but its not really ‘peak in demand’ cause that kinda language suggest it was wanted or deliberate. ‘demand destruction’ more correctly identifies that society is disappearing. like the joke says, now they living in a Chevy van and they think its the Taj Majal.
nemteck on Tue, 2nd Apr 2013 3:51 pm
The Citi analysis must have been done by a high school apprentice. It is well known that natural gas production of the Bakken fields, Eagle Ford, Heynsville, etc., is a bubble. Well productions decrease 40-90% in the first year. To offset this, more and more wells have to be drilled just to keep production constant. Its the “red queen” treadmill syndrome. It will come to an end in 3 to 5 years.
Secondly, Citi assumes that, if cars, power plants, etc., are converted to natural gas, the natural gas price will keep constant. That is totally wrong. Even now the gas price in the US is just half what it is in the rest of the world. This is unsustainable and the US will catch up to it once the gas production decline accelerates.
Plantagenet on Tue, 2nd Apr 2013 4:04 pm
The whole reason for peak demand for oil is ever-higher oil prices. The suggestion that “peak demand” will result in lower gasoline prices is silly.
J-Gav on Tue, 2nd Apr 2013 9:18 pm
FT talkin’ out of its ass here. Good hits, DC, Norm and Poaec! Peak demand? We’ll be getting there but it ain’t here yet, simply because there’s nothing else on line (or in the pipeline)to replace the stuff … Demand destruction will take a toll in the West but as long as China, India, Indonesia, etc (ie half the population of the world) continue to grow their economies, demand will still be there, the only question will be price and ability to pay.
sheila chambers on Tue, 2nd Apr 2013 11:10 pm
Moving our fuel demand to natural gas is foolish in the extreme. This gas fracking boom is sure to go bust soon and rising fuel prices will indeed lower demand as fewer people will be able to afford to pay the higher costs. Peak oil is real whether you call it peak demand or peak oil, it’s the same thing, higher costs for a declining supply.
Natural gas is not as portable or energy dense as oil, fill your tank with gas and you won’t get very far and a tank full of pressurized gas is a moving bomb!
Moving to natural gas from oil will only deplete the gas sooner and faster leaving us in even a deeper hole, a hole most of us will be buried in.