Energy revolution sparks ‘peak oil demand’ theory

There’s a new ‘peak oil’ theory doing the rounds, this time with a twist: instead of an imminent peak (and subsequent decline) in global oil supplies that causes oil prices to soar, oil demand growth is expected to slow down more quickly than expected and this will result in lower oil prices going forward.

In a report titled, ‘Global Oil Demand Growth – The End is Nigh’, commodities analysts at Citigroup predict that oil demand growth is likely to be hindered by cheaper substitutes and improvements in fuel efficiency.

A boom in US shale gas production has caused natural gas prices there to plummet, and that in turn is enticing industrial energy users to switch to gas-fired power generation rather than oil- or diesel-based power generation. Continued improvements in automobile fuel economy will also limit demand growth from emerging economies, with Citigroup predicting fuel usage will drop by an average of 2.5 per cent per new vehicle each year.

Citi’s long-term view is that the structural bull market of the previous 10 years or so will not be repeated this decade; instead, “by the end of the decade Brent [oil] prices are likely to hover within a range of $80 (£53) to $90 per barrel”. That’s down from about $111 a barrel today. However, that theory rests on certain technologies being widely adopted – such as large-scale gas-fired trucks, trains and ships – as well as continued anti-carbon policy adoption by governments.

Even economists at perennially bullish BP (BP.) admit rising unconventional energy supplies are playing their part to limit further big price gains. In its BP Energy Outlook 2030, the company forecasts global shale gas production will more than treble and tight oil supplies will rise more than six-fold over the next two decades. That said, BP also argues strong oil demand growth from developing economies will outweigh improvements in fuel efficiencies and rising unconventional energy supplies, such that new sources of conventional oil will still need to be found.