Peak Oil is You
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Page added on January 19, 2018
Peak oil demand and its implications for prices
Even if oil consumption reaches a peak and then starts to fall, the world will still need large quantities of oil for many decades to come.
“Global oil demand is likely to continue growing for a period, driven by rising prosperity in fast-growing developing economies,” they wrote in a paper published on Monday.
“But that pace of growth is likely to slow over time and eventually plateau, as efficiency improvements accelerate and a combination of technology advances, policy measures and changing social preferences lead to an increasing penetration of other fuels in the transportation sector.”
The implication is that consumption is likely to reach a maximum at some point and then start to fall, though the timing and magnitude of the peak are highly uncertain and very sensitive to assumptions.
And even once demand has peaked, consumption is unlikely to drop sharply, the authors argue, given the inherent advantages of oil as an energy source, particularly its energy density.
“Peaking oil demand is not expected to trigger a significant discontinuity or sharp fall in demand,” they wrote (“Peak oil demand and long-run oil prices“, OIES, Jan. 2018).
Under most scenarios, the world will still be consuming tens of millions of barrels of oil per day through the middle of the century.
There are sufficient known oil resources to meet all the world’s oil demand through 2050 twice over, according to BP estimates (“BP Energy Outlook”, 2017).
But given the natural decline in output from existing fields, substantial investment will be needed to turn those resources into reserves and produce them.
ABUNDANCE
The predicted peaking of consumption, coupled with vast resources, and new production made possible by hydraulic fracturing and horizontal drilling have transformed the long-term outlook for the oil industry.
The dominant narrative, which before 2008 was characterised by fears about future scarcity and oil supplies running out, has been transformed into one about future abundance.
Some now worry that many of those resources will never be needed and may become stranded assets – a welcome development for climate campaigners but a potential problem for oil producers.
Peak oil demand signals “a shift in paradigm: from an age of scarcity (or more accurately perceived scarcity) to an age of abundance, with potentially profound implications for oil markets”, according to Dale and Fattouh.
In an era of abundance, oil markets are likely to become increasingly competitive, as resource owners compete to secure market share and produce their reserves rather than risk them being left in the ground.
“Faced with the possibility that significant amounts of recoverable oil may never be extracted, low-cost producers have a strong incentive to use their comparative advantage to squeeze out high-cost producers and gain market share.”
Better to have money in the bank than leave oil in the ground.
As the oil market becomes more competitive, low-cost producers will find it more profitable to switch to a high-volume, lower price strategy – in contrast to the old strategy of restricting volumes and raising prices.
The authors do not name any countries but the argument applies especially to Saudi Arabia, Kuwait and Abu Dhabi, and to a lesser extent to other major producers in the Middle East and North Africa.
The implication is that many producing countries will see revenues and formerly high resource rents decline, to the benefit of consumers.
SOCIAL COSTS
In theory, competition for market share should drive oil prices down to the marginal cost of extraction, which the authors suggest could be lower than $10 per barrel for the major Middle East producers.
But these countries rely heavily on oil revenues to fund government operations, defence, healthcare, education and social safety nets. They need prices well above the marginal cost of extraction to maintain their economic, social and political systems.
To be sustainable, oil prices must be high enough to cover these “social costs” as well as the much lower costs of physical extraction.
The authors cite fiscal breakeven prices as a proxy for social costs and say breakevens for five major Middle Eastern producers averaged $60 per barrel in 2016 compared with a physical cost of production of just $10.
Many low-cost producers recognise the need to diversify their economies away from dependence on oil but experience suggests such transitions take decades to complete.
In the meantime, the authors argue, many low-cost producers will try to resist the shift to a higher-volume, lower price strategy while they try to make progress with the transition.
TRANSITION
The problem with this argument is that it makes oil prices a function of social costs. In reality, it is the other way around – price drives social spending.
The social structures of the major oil-producing countries were shaped by the enormous influx of petroleum revenues during the 1970s and again in the 2000s. Efforts at social reform and economic diversification have come when prices and revenues fell, during the 1990s and again since 2014.
Dale and Fattouh argue that “it is likely that many low-cost producers will delay adopting a more competitive strategy until they have made significant progress in reforming their economies. This is likely to slow the speed at which the new competitive oil market emerges.”
“The shift to a more competitive oil market environment won’t just happen on its own accord, it requires a critical mass of low-cost producers both to recognise the need to adopt a more competitive strategy and, more importantly, to have reformed their economies sufficiently for them to be able to adopt such a strategy sustainably.”
If social costs in many low-cost producing countries remain high, according to Dale and Fattouh, that is likely to slow the pace at which a more competitive market takes hold, until they can reduce them.
“It seems likely that the average level of oil prices over the next 20 or 30 years will depend more on developments in the social cost of production across the major oil-producing economies in the world than on the physical cost of extraction,” they conclude.
MARKET POWER
Fattouh and Dale assume that Saudi Arabia and the other low-cost Middle East oil producers can successfully exercise market power, restricting production to keep prices high.
But they are probably overstating OPEC’s market power. Experience suggests Saudi Arabia and OPEC can wield significant market power in the short term but have struggled to control prices in the longer term.
In the 1980s, OPEC’s market power was broken by the emergence of rival oil supplies from the North Sea as well as Russia, Alaska and China.
In the 2010s, its market power was hit by the emergence of U.S. shale, Canadian heavy oil and deepwater projects.
In practice, prices have been driven by the cost of developing and producing alternative supplies outside the major producing economies of the Middle East.
The cost of these alternative supplies is well above the $10 physical extraction cost of the major Middle East fields – but it may or may not be high enough to cover their social costs.
In future, the major oil producers will also have to reckon with increasing competition from other forms of energy in the transportation sector, notably electric vehicles, which will further limit their pricing power.
Dale and Fattouh conclude that social costs and the pace of economic reform in the major oil producing countries will have a decisive impact on oil prices over the next few decades.
In practice, the opposite is probably true. Oil prices and the degree of competition from other sources of supply, as well as electric vehicles, will have a decisive impact on the producers’ social spending and the rate of diversification.
21 Comments on "Peak oil demand and its implications for prices"
Antius on Fri, 19th Jan 2018 12:01 pm
It means a big drop in prices, because for oil demand to peak, the world would need to be financially destitute, in which case people cannot afford the oil, requiring a price drop for supply and demand to balance.
Lower prices mean less oil supply, et voila, peak oil supply arrives around 2020, smack in the middle of when oil geologists said it would, before the long orgy of debt laden future-eating started in 2008 and idiots quickly assumed that low EROI tight oil would replace declining output of high-EROI conventional oil because ‘better technology’ apparently allows us to defeat the second law of thermodynamics.
Peak oil demand means peak mobility (i.e. less mobility of labour) and peak shipping for manufactured goods and commodities (i.e. less consumption of real goods in the economy). Peak oil demand means a lot of people getting poorer.
The artificial separation between oil demand and supply in the minds fossil fuel pundits, is a fake issue that either demonstrates a lack of understanding of how declining energy source EROI effects the world economy or a deliberate attempt to mislead. These people are desperate to prove to the world that there are no geological constraints on the Earth’s supply of rotten dinosaur juice. They miss or pretend not to notice the obvious truth that no-one would be investing in tight oil if vast supplies of conventional oil were available to supply the US economy.
Antius on Fri, 19th Jan 2018 12:04 pm
If the global economy goes half as tits-up as Mastermind seems to think it will over the next few years, oil demand will indeed peak.
Dead people don’t consume oil. In fact, dead people become oil, if we bury them deep enough. I propose that all American fast-food eaters should be buried in the hot-zone, so that future generations get to enjoy the benefits of cheap oil.
MASTERMIND on Fri, 19th Jan 2018 12:24 pm
Antius
LOL that was one of the funniest comments I have ever read on this board! Yes a few dozen 300lb Americans buried deep enough! We could have quite the gusher a few million years from now!
MASTERMIND on Fri, 19th Jan 2018 12:35 pm
Financial markets at risk from bubble, IMF warns
http://www.telegraph.co.uk/business/2018/01/15/financial-markets-risk-bubble-imf-warns/
MASTERMIND on Fri, 19th Jan 2018 12:54 pm
Antius
The MSM has done an excellent job calming the cattle before they are slaughtered!
peakyeast on Fri, 19th Jan 2018 1:00 pm
Yes there should stringent standards for how mass graves are excavated and covered in order to optimize for future usage. A complete new subset to the building codes. Shame on all those people ruining the existing feeble attempts on planning for future oil production by excavating them doing no good at all – but just to show off some dead bodies.
Davy on Fri, 19th Jan 2018 2:55 pm
It’s the economy stupid. Will this 21st century global economy of managed liquidity and rate repression with corresponding elevated markets continue to produce an acceptable growth rate? Acceptable growth rate
means maintaining globalism. Globalism must have positive growth. Can the malinvestment of bad debt not overwhelm productive efforts? How long can the parasitic wealth transfer of Ponzi economics continue without destroying the foundational elements of society? How strong will the renewables transformation be with our energy sectors? Will transportation be transformed with EV’s. These relate to peak oil demand becuase oil is a foundational energy source. Oil is now stranded in a unhealthy economic range. Prices are not quite right for producers or consumers. More efforts at production are needed but can we afford expensive oil?
If the economy breaks down from positive average growth we may see demand destruction. It is rarely talked about by articles making forecast of the future. It is always assumed to be there. Maybe business cycles are a thing of the past but I doubt it. It is likely the next downturn will be rough because we are in denial they can happen anymore.
onlooker on Fri, 19th Jan 2018 3:34 pm
All this massive Debt right now is doing is covering up the systemic irregularities and dysfunctions while putting more of a burden on everyone and especially going forward. The only reason this massive debt bubble right now has not burst, is that it includes everyone and TPTB know that, its bursting will shatter what remains of this fragile smoke and mirrors show and expose the underside and profound vulnerabilities of a worldwide economic system that is simply not tenable for very much longer.
Pat on Fri, 19th Jan 2018 4:20 pm
“It seemslikely that the average level of oil prices over the next 20 or 30 years..”. the bau continuing for ever coming from junk fiat economy, NASDAQ. when oil reserves shown billions higher than in reality these 20 -30 years will look like world has not more than 5 to years of normality. The samples, signals of all hell break loose can seen in end of 2018 with the oil shortages……prepare…
Cloggie on Sat, 20th Jan 2018 10:10 am
Hey taxi!
https://cleantechnica.com/2018/01/20/autonomous-vehicles-got-intrigued-feel-riding-self-driving-taxi/
The entire world is busy making the promise of autonomous car a reality. Since I work again I see it happening as well on a daily basis:
https://www.hightechcampus.com/
https://www.youtube.com/watch?v=lJq-3FCPqRM
(Apple, Samsung, Intel, AMD, all wonderful, but this area with its chip manufacturing machine monopoly is the de facto global IT-hardware-center)
The pedestrian zone is used as a testing area for a French e-vehicle and hence very quiet and you could be surprised by it, but luckily it sees you much better than you can hear it. So far it only drives at a walking pace.
This development will be a significant cause for the upcoming global peak oil demand event as it will detach door-to-door transport from the necessity of owning a vehicle. The car as the next taxi, like a minibus, but it is much easier of getting a car filled with passengers than a bus or a train, hence a great increase in efficiency.
Expect the global car manufacturer death and a huge decrease in oil demand:
https://deepresource.wordpress.com/2017/05/16/by-2030-you-wont-own-a-car/
MASTERMIND on Sat, 20th Jan 2018 10:46 am
CLogg
You are putting the cart in front of the horse in regards to self driving cars..Especially after those uber test this year…and the Uber crash! You live in a fantasy land. lol
Boat on Sat, 20th Jan 2018 10:52 am
If the world uses 100 mbpd or 50 mbpd oil demand will still control prices. If producers oversupply prices will drop. Underproduce and prices rise. Geopolitics and weather events will jack the price around like always. It’s amazing how many humans can’t figure out this simple concept.
Boat on Sat, 20th Jan 2018 11:03 am
Pat,
Oil shortages at the end of 2018? The Russian/OPEC induced shortage? Just ask them to pump more oil. They wouldnt rape a nice guys wallet like you if you ask nice.
MASTERMIND on Sat, 20th Jan 2018 11:27 am
Pat
You are right my friend…Ed Morse CEO of Citi thinks they are coming this year. The IEA and Saudi’s think around 2020..But I wouldn’t be surprised if they come sooner than later..And when they do they are going to knock this planet off of its orbit! The stock market will crash and collapse. The pubic will lose all faith in government! All hell will break lose! All the public’s hopes and dreams about a bright future will be crushed like a paper bag!
MASTERMIND on Sat, 20th Jan 2018 11:31 am
Pat
The last time the US had an oil shortage it caused the largest stock market crash since the great depression. Now imagine when a world oil shortage hits with no solutions or quick/easy fixes…It will be a fast crash and collapse! It will be every corporation and social program going bankrupt at once..Then people will be eating people! You will wish you were never even born..You will be so scared to sleep every night without the rule of law you will have constant nightmares.
Boat on Sat, 20th Jan 2018 11:40 am
MM,
Any producer could shut down production a few mbpd and throw the world in a mess. Venz may do the job soon. But that aside there is no oil shortage, just a few geopolitical issues at this time.
MASTERMIND on Sat, 20th Jan 2018 11:51 am
As M. King Hubbert (1962) shows, Peak Oil is about discovering less oil, and eventually producing less oil due to lack of discovery.
https://imgur.com/a/6dEDt
IEA Chief warns of world oil shortages by 2020 as discoveries fall to record lows
https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000
Saudi Aramco CEO sees oil shortage coming as investments, oil discoveries drop
https://www.reuters.com/article/us-aramco-oil/aramco-ceo-sees-oil-supply-shortage-as-investments-discoveries-drop-idUSKBN19V0KR
Peak Oil Vindicated by the IEA and Saudi Arabia
MASTERMIND on Sat, 20th Jan 2018 11:52 am
The close alignment between the LTG BAU scenario and observed developments over the last four decades, as well as the correspondence in the underlying dynamics …, portend of potential global collapse. Although the general commentary on the LTG describes collapse occurring sometime mid-century (and the LTG authors stressed not interpreting the time scale too precisely), the BAU scenario implies that a relatively rapid fall in economic conditions and the population could be imminent. Indeed, other aspects of oil supply constraints …, indicate that the ongoing economic downturn of the GFC may be representative of an imminent BAU style collapse. (page 14 –
http://sustainable.unimelb.edu.au/sites/default/files/docs/MSSI-ResearchPaper-4_Turner_2014.pdf)
MASTERMIND on Sat, 20th Jan 2018 11:56 am
Financial markets at risk from bubble, IMF warns
http://www.telegraph.co.uk/business/2018/01/15/financial-markets-risk-bubble-imf-warns/
And Oil shortage will pop the stock market bubble and cause another 1929….
And World Governments Gross Debt to GDP (330%)
https://imgur.com/a/3usX7
Will create cascading government defaults worldwide!
I would say you need to prepare but there is amount of preparation in this situation that will do you any good. You are going to die regardless a very horrible and painful death.
Boat on Sat, 20th Jan 2018 2:51 pm
MM,
Let’s put your predictions down. The big oil led crash by 2019? Give me a date.
MASTERMIND on Sat, 20th Jan 2018 3:53 pm
Boat
I believe the limits to growth computer models which peg the collapse by 2030…And they are not “predictions”…