How close is the world to 'peak oil demand'?

Demand for crude oil unlikely to drop drastically, despite the rise of electric vehicles

Electric vehicles, such as Tesla's new "Semi" electric truck, have led many to question whether oil demand is about to peak. Veronique Dupont / AFP

The idea of peaks, of dramatic shifts in the balance of power, the changing of the guard as the old gives way to the new, has always had a grip on the imagination. In the early 2000s, believers in “peak oil supply” foresaw an apocalyptic world of economic collapse and war. Now, supporters of “peak oil demand” paint a utopian picture of cheap, clean energy. It’s this second idea that is the focus of a new paper from BP chief economist Spencer Dale and the director of the Oxford Institute for Energy Studies, Bassam Fattouh.

The theory of peak oil supply is that the production of oil would imminently start to decline and that prices would rise sharply, because new oil supplies were physically limited in quantity and could not be brought to market quickly enough and/or were too expensive or difficult to extract. This idea has subsequently been rendered obsolete by the realisation of vast new petroleum resources from shale, as well as deepwater and established producers such as Iraq.

By contrast, the idea of peak oil demand is that new technologies — specifically, electric vehicles — will become superior to oil-fuelled transport. They will be cheaper, more convenient and cleaner, leading consumers to prefer them and governments to enact policies to encourage them. At some point, the logic goes, oil demand will stop increasing and go into decline, even while potential supply remains abundant.

Of course, supply and demand are always equal, excepting changes in the quantity of stored oil, which are minor in the overall balance. So how would we distinguish a peak in oil supply versus a peak in oil demand?

Simply, if the fall is being driven by restrictions of supply, then prices would be high and rising, and the world economies would be damaged (apart from that of the remaining oil producers). On the other hand, if the fall is caused by a drop in demand, then prices would be low and tending to fall, and the world economy might be doing well or badly. A global recession, for instance, would contribute to a decrease in oil demand at least for a time, as in 2008-09, but the replacement of oil by electric cars could happen alongside an economic boom.

The world has already been through an episode of peak demand. From 1979 to 1983, world oil consumption fell by 14 per cent, as the Iranian revolution and the Iran-Iraq war interrupted exports. But demand was falling faster than supply: prices, adjusted for inflation, dropped from $104.5 to $71. Opec countries had to cut back production sharply to prevent an even sharper fall. Vehicle efficiency improved and oil for electricity generation was replaced by natural gas, coal and nuclear power, at the same time as a deep recession hit in the industrialised world.

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That peak demand episode ended once economic growth returned. Yet it seems now inevitable that new technologies will replace oil, at least for ground transport, within the not so distant future. Several countries, such as China, France and the UK, have announced that petrol- and diesel-fuelled vehicles will be banned by 2030 or 2040. All major car manufacturers offer electric vehicles, electric bikes are increasingly popular, while Tesla has introduced a battery-powered lorry. At sea, short-range electric ferries and barges are starting to be used, and liquefied natural gas is a possible fuel for long journeys. Even electric and hybrid planes are being trialled.

Still, it is odd to have so much talk about a decline in oil demand, when growth in recent years has been strong. The US has 795 vehicles for every 1,000 people; China has 154 and India has just 42, leaving a lot of room for growth even if alternative vehicles gain a growing share of the market. US oil demand declined from 2005 up to 2012 as high prices encouraged efficiency, but has grown since. Two-thirds of world oil use goes to transport, but some 16 per cent is used in petrochemicals, which keeps growing. Accordingly, some forecasters see a demand peak as early as 2025; others, such as ExxonMobil, by 2040 or at some indeterminate date beyond that.

Mr Dale and Professor Fattouh argue that the exact timing of a peak in demand is very hard to predict, and actually not that interesting. More of concern for the industry is how demand evolves after the peak and — a topic worthy of a book, not just an article — how major oil-producing companies and countries can adapt.

As an illustration, if oil demand peaks at 105 million barrels per day in 2025 and drops thereafter at 3 per cent per year, it would fall to 49 million bpd by 2050, and 700 billion barrels would be produced in that period, which is less than the proved reserves of the Middle East alone. But if production were flat during the 2025-50 period, 1 trillion barrels would be produced. The difference between those two figures is more than the reserves of Saudi Arabia.

As demand falls, the price of oil will drop too — opening up possibilities for new consumers. The end of oil will not be a sudden precipice, but a slow descent. The nimble will use their resources fully, while trillions of barrels will remain in the ground unused forever.

Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis