Peak Oil Is Real – On The Demand Side

In 1956, a little-known geologist named Marion King Hubbert published a paper predicting that oil supplies were destined to reach a peak as the cheap and easy to tap reservoirs were depleted over time. He predicted that US oil production would peak somewhere between the late 1960s to early 1970s. Others, including oil financier Mathew Simmons, extrapolated the supply and demand data and predicted a similar fate for global oil supplies.

Both arguments are plausible – which explains why peak oil theory has been around for a while. And the recent shale gas boom and discovery of unconventional oil in places like North Dakota supports those who say we are far from the peak oil.  But new evidence suggests that the focus of the debate should be changing from supply to demand.

Source: Citi Research

If the global demand for oil is destined to slow down, as many now believe, then peak oil may become a reality not because we’ll run of oil, but because we won’t be needing as much of it as had been assumed. Especially if the price of oil remains high and/or rises, while the price of alternatives, such as natural gas or renewables, remains low or further declines.

This new version of peak oil theory, focused on demand, has gained momentum in the recent past with the publication of a report titled Global Oil Demand Growth: The end is nigh by Citigroup in April 2013. Not surprisingly, it has led to a number of studies and articles questioning the wisdom of long-held views that the demand for oil will continue to grow into the future, only modestly affected by the current high prices and the relative abundance of alternative energy sources with lower and declining costs.

• First, is that oil prices are, and have remained, high by historical standards. High prices are encouraging drivers towards smaller, more efficient cars and governments to reduce fuel subsidies while imposing mandatory fuel economy standards for new cars, trucks or whatever uses oil.
• Second, much of the future oil exploration is likely to be in challenging environments – geologically and/or politically – which is unlikely to produce much oil at low prices.
• Third, natural gas supplies appear abundant and at prices that compete head on with oil in most applications, certainly in North America.
• Fourth, renewable energy technologies are not only abundant but have zero fuel costs, which are not indexed to price of oil and will not rise should natural gas prices spike.
• Finally, a new and abundant energy resource, energy efficiency, is gradually getting recognized as the cheapest option around, with few environmental side effects

Source: Annual Energy Outlook 2013, Energy Information Administration

The oil business, of course, is dominated by National Oil Companies (NOCs) and the so-called super-majors, who are not nearly as super as they used to be. The producers prefer a continuation of the status quo, even if oil is not as easy or cheap to find and produce as in the old days. Not surprisingly, they forecast fairly robust demand projections, certainly not at historical rates, but at rates that suggests continued growth into the indefinite future.

The International Energy Agency (IEA) tends to agree, projecting growing demand while acknowledging slower growth rates, especially in mature OECD economies. IEA’s latest projection expects global oil demand to reach 99.7 million barrels a day in 2035 from 87.4 in 2011.

Likewise, the non-partisan Energy Information Administration (EIA), in its latest Annual Energy Outlook 2013, projects growing global demand for oil, consistent with the IEA. But the US is projected to become – believe it or not – a modest net exporter of oil possibly by 2040.

But Citi’s new analysis suggests these projections may be missing the mark by ignoring or significantly under-estimating the five driving factors listed above. The combination of cheaper natural gas and steady improvements in fuel efficiency “is enough to mean that oil demand growth may be topping out much sooner than the market expects,” according to Seth Kleinman, Global Head of Energy Strategy at Citigroup.

Coming from Citi, the contrarian view has found a captive audience as Financial Times, The Economist and others published articles on the subject. The latter highlights Citi’s insights as part of a global oil industry briefing on 3 Aug 2013. While the differences in projections may seem trivial to the layman, they are anything but trivial to people in the oil business, which is nearly everyone. Moreover, a lot is at stake not just for the oil majors, but the entire energy sector since oil often serves as a global benchmark or proxy for virtually all energy prices.

Source: Agency/Company Information

Citi presents three future scenarios:

• First is a business as usual case where global oil demand continues to grow at 1.2% a year through 2020 resulting in 98 mmbd by the end of the decade;
• Second scenario incorporates the impact of improved fuel efficiencies in cars and trucks over the same period; and
• Third, includes the continued substitution of cheaper natural gas – and renewable resources, although the latter is not specifically mentioned in Citi’s analysis, because it is focused on petroleum products, whereas the impact of renewables are mostly felt in the electric power sector.

The bottom line is that considering these factors, global oil consumption does not exceed 92m b/d and flattens after mid-decade. “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 concludes.

As other commentators have observed, peak oil demand, like peak oil supply, is a theory that relies on a number of assumptions, some of which may or may not prevail and/or may not make as much of an impact as envisioned. Just as the peak oil supply theory has been challenged with the advancement of technologies – hydraulic fracturing, horizontal drilling and alike – that have made non-conventional oil and gas resources affordable, the peak oil demand theory may not prevail despite its appeal. For example, the substitution of natural gas for petroleum in transportation sector – a key assumption – may not be as swift or dramatic as Citi predicts. Large-scale conversion of trucks, trains and ships to natural gas requires extensive infrastructure and may take longer than projected.

Moreover, there are many who doubt the longer-term sustainability of the current US shale gas boom or its replication in other parts of the world. Wide-scale conversion to natural gas can only be sustained if the price differential is substantial and can be maintained over time. One theory is that as large number of cars, trucks, trains and ships begin to convert to natural gas, the supply glut disappears and prices rise, dampening the conversion. The counter argument, of course, is that rising natural gas prices will encourage more exploration, resulting in more discoveries of both conventional and unconventional gas.

Similarly, other key assumptions of Citi’s analysis may not materialize. For example, the prevailing petroleum subsidies may prove difficult to reduce or remove as has been demonstrated in countries that have attempted to phase them out. Or the growth of car ownership in developing world can outstrip efficiency gains in fuel consumption. China, for example, has imposed 6.9 liters per 100 km (34 miles per gallon) for new cars by 2015 and 5 liters/100 km (47 mpg) by 2020. Such measures, including the new 55 MPG standard for new US cars by 2025, will reduce demand for petrol but may not be sufficient to reduce or flatten out overall demand for oil.

No matter what, however, Citi’s provocative narrative has given everyone a new and intriguing theory to think about. Should the demand for oil flatten or in fact decline globally, as it has in mature OECD economies, oil producers and the oil majors need to reboot (see box). Nobody is projecting that the demand for oil will evaporate any time soon, but a flattening demand would intensify competition among major exporters, will diminish the political influence of countries like Saudi Arabia and Russia, and may make US less inclined to meddle in the geopolitics of oil in the Middle East – among other things.

20 Comments on "Peak Oil Is Real – On The Demand Side"

Arthur on Sat, 21st Sep 2013 12:41 pm 



Yep, I think this is true. It is not an empty beer barrel that will spoil the party, but simply that the price of beer that is too high that will limit consumption and that peak demand will supersede peak supply.
WRONG: petrol stations with cars lining up with consumers with full wallets but no oil (geology constraint).
RIGHT: petrol stations with few customers who can buy all the gas they need against high prices (price constraint).

dashster on Sat, 21st Sep 2013 1:33 pm 



I am pretty sure they used to project 120 to 130 million barrels per day out in 2030. Would be nice if the mainstream press reported on that instead of the death of the “Peak Oil Theory”.

Beery on Sat, 21st Sep 2013 2:14 pm 



“In 1956, a little-known geologist named Marion King Hubbert… predicted that US oil production would peak somewhere between the late 1960s to early 1970s. Mathew [sic] Simmons… predicted a similar fate for global oil supplies.

Both arguments are plausible…”

Yeah, they’re really REALLY plausible, since both of them actually happened.

Peak oil is not a theory – it’s a mathematical certainty that was proven in 1970 for US crude oil production, and in 2005-2012 for global crude oil production. Anyone who claims otherwise either doesn’t understand the issue, or is lying.

actioncjackson on Sat, 21st Sep 2013 2:36 pm 



More efficient vehicles, on an individual basis, reduces the amount of gas one needs to purchase to drive the same distance as a less efficient vehicle, saving money. However, this would effectively make it cheaper to own a car resulting in an increase in car purchases that would eventually lead to an increase in fossil fuel consumption on the whole, not decrease.

If hydrocarbons, oil in particular, which are non-renewable are an input of a process, then that process is by default unsustainable, and there are very little processes that oil is not the driving component. It doesn’t matter how “efficient” it is, if it uses oil it’s depleting the resource.

I just don’t see anything replacing oil, there’s too much energy contained in it and it’s too easy to utilize it.

Arthur on Sat, 21st Sep 2013 2:42 pm 



Nobody denies that fossil fuel is a finite resource and that per definition there will be a moment in time where production will peak. Every CEO of any big oil company will confirm that, that’s not the issue. Under debate here is, how the end of the oil age will happen. The hypothesis is that consumers will abandon oil before oil abandons consumers, via the price mechanism AND because there are cheaper alternatives emerging. That is what we see happening in Europe, not in the least because energy is heavily taxed there.

Malarchy on Sat, 21st Sep 2013 3:14 pm 



The thing that hardly anyone mentions, being so focused on the energy aspect of oil, is that oil is the feedstock for tens, if not hundreds, of thousands of chemicals and products that we take for granted, and without which life would be very different. Wind turbines, solar cells and any other energy resource will not produce one gram of plastic, weedkiller or paint. Plant material can be used, with the appropriate conversion technology, but this will be in direct competition with food production. Along with the production of biofuel. With a still growing population the future looks very bleak!

Arthur on Sat, 21st Sep 2013 4:35 pm 



Everybody focusses on the energy aspect of oil because that is what oil is primarily used for, probably 90% or higher (I think). Plastic for instance takes 2.7% of total US crude oil consumption (source Mother Jones).

Solarity on Sat, 21st Sep 2013 5:03 pm 



“…renewable energy technologies are not only abundant but have zero fuel costs.”
This statement has two blatant problems. First, what renewable technology requires absolutely no energy to produce or deliver? Second, it assumes that production and maintenance costs for utilization of renewable technology is equivalent to that of non-renewable applications. The EROEI of electric vehicles becomes positive only after many years of use.

LT on Sat, 21st Sep 2013 5:30 pm 



“Nobody denies that fossil fuel is a finite resource and that per definition there will be a moment in time where production will peak. Every CEO of any big oil company will confirm that, that’s not the issue. Under debate here is, how the end of the oil age will happen. The hypothesis is that consumers will abandon oil before oil abandons consumers,…”

>> You bring up a very interesting point.

I think the consumers have almost no control of it. It is the “control system” that has created the modern living arrangement. So, only the “control system” has the power and the means to make changes. But do they want to do that? Probably not.

So, the end will not be peaceful as many already point out. Look at the collapse of the USSR and Argentina in the 90s and 2000s.

Arthur on Sat, 21st Sep 2013 5:47 pm 



“I think the consumers have almost no control of it.”

Yes they do. There is still plenty of ($120) oil in Germany. Yet there is a massive switch going on towards solar, undertaken by *consumers* mostly. They don’t have, in the short term, but they realize that in the long term there is no choice, so they act.

In Holland the market for big cars is flat on it’s face, everybody wants to drive small.

actioncjackson on Sat, 21st Sep 2013 7:51 pm 



Solarity,

Electric vehicles are not an energy source, they yield no energy in return to that invested, thus the numerator is zero and EROEI is zero, as far as the math goes. All they do is use up energy and give none back, you follow?

GregT on Sat, 21st Sep 2013 11:27 pm 



Solar panels are also not an energy source, they are manufactured with, and created by technologies resulting from, fossil fuels.

They are nothing more than an extension of the fossil fuel age, as is all electric power generation.

BillT on Sun, 22nd Sep 2013 2:09 am 



Arthur assumes that materials and products will be magically transported from one location to another through wormholes in the atmosphere, I guess.

No thought to the infrastructure to make it possible to produce and deliver such ‘renewables’. Too bad reality gets in the way of so many techie dreams.

Difficult to accept that their lifestyle is about over … but factual.

GregT on Sun, 22nd Sep 2013 6:20 am 



Yes BillT,

Far more comfortable to believe in being saved by an unrealistic dream, then to face reality.

Cognitive dissonance.

Arthur on Sun, 22nd Sep 2013 10:36 am 



Greg, Bill, not to put you down, but I have a university degree in physics, so I know what I am talking about. You can very well produce solar panels with energy from other solar panels, provided eroei is substantially larger than one, which is the case and getting better all the time, comparable to developments in the area of digital data storage, as any Google or NSA employee can confirm. Solar panels are an extension of the fossil economy only initially, to kick start the renewable economy of the future.

And don’t give me that crap about crumbling infrastructure. European ships arrived at all global shores as early as the 16th century, that’s why you exist in the first place (watch Pirates of the Caribbean) and there was a vast road network in Europe under the Romans, 2000 years ago. All without any use of either fossil fuel or renewable energy.

Yes, economic growth is over for at least a century. Globalism/imperialism is out. Excessive 500 mph mobility will soon be a thing of the past. The car has its best days behind it. The wellfare state will be abolished because of lack of funds (our prime minister admitted as much in the past week). On the social level, life will be recentered in ethnic groups, paternalism and family will be back at the cost of feminism and gaypride. But there will be life after the crash, probably initiated by a global financial crash, wiping out most savings, dollar as a reserve currency and fiat money and replaced by real values like barter and precious metals. We (in the north, formerly known as the west) will still have a modicum of comfort left, slowly declining, but there will be a bottom, defined by the capacity of an emerging renewable energy system, with Europe taking the lead, not because we are supermen, but because we have to and because we are not stuck with an anachronistic, useless MIC and coupled petro-dollar which prolongues your oil addiction.

In the future there will be locally produced food on the shelves, a limited rationed amount of electricity for those who can’t produce it themselves, public transport, private two-wheel mobility, with possibly limited use of electro-cars for the happy few, cafe’s, restaurants, theaters,high-tech telecommunication will continue to exist, solar panels on all roofs, windturbines whereever you look, a process now underway in Europe. Airports will be closed one after the other, except for a few big ones, with very limited traffic. Maintenance of 4-6 lane highways will be limited to one lane only. Old 19th century railway tracks will be revived.

The Four Horsemen can be watched in the cinema.

Malarchy on Sun, 22nd Sep 2013 10:45 am 



Arthur – thank you for replying. Plastics was simply one use other than transport. Check out http://www.oneangryman.com/ken/2010/06/what-else-is-oil-used-for/ where it claims that only 46% of a barrel goes for transportation. That other 54% is basically what makes modern life modern.

Arthur on Sun, 22nd Sep 2013 11:41 am 



Yes Malarchy, but the other 45% is probably used for heating and power generation, that can be replaced, to some extent, by renewables as well.

GregT on Sun, 22nd Sep 2013 3:15 pm 



I think that Detroit is a much better example of the direction that we are headed towards, not Disneyland.

Beery on Mon, 23rd Sep 2013 6:01 am 



“I have a university degree in physics, so I know what I am talking about.”

Well, only if you got the degree yesterday, and only if what you’re talking about is what you were tested on. Otherwise, you could still be full of shit.

I got a degree in engineering over 30 years ago. I stopped working as an engineer 25 years ago. Don’t ask me to solve any engineering problems, because I doubt I’d know much more than my wife, who studied sociology.

Arthur on Mon, 23rd Sep 2013 9:20 am 



“Don’t ask me to solve any engineering problems, because I doubt I’d know much more than my wife, who studied sociology.”

I’ll take your word for it, Beery.