Global oil demand is under pressure, creating concerns that the world has reached peak oil.
In 2019, global oil demand totaled about 100 million barrels per day, double 1970 levels. Over the past 50 years, the global oil market has cycled through several highs and lows in the oil price. The most recent major low was in response to COVID-19 lockdowns and cutbacks to air travel around the world.
By the fall of 2020, continued downward pressure on oil demand led the International Energy Agency (IEA) to issue a dire report about the state of the global oil industry.
Around that time, headlines across serious publications began warning the market was headed toward “peak oil.” Even the world’s biggest oil producers were making that call — in fact, BP’s (NYSE:BP,LSE:BP) 2020 energy outlook proposes that peak oil has already been reached. The multinational energy company expects oil demand to fall by 10 percent by 2030 and by up to 50 percent by 2040.
This same sentiment was echoed in early February 2021 by global oil producer Royal Dutch Shell (LSE:RDSA,LSE:RDSB,NYSE:RDS.A), which said in a statement that its “oil production peaked in 2019,” and it expects its production to decline by 1 to 2 percent per year.
Is the world on the verge of reaching peak oil? Here the Investing News Network explores what peak oil is, as well as the arguments for and against the peak oil theory.
What is peak oil?
Peak oil references the hypothetical point in time when global oil supply will enter a terminal decline.
Investopedia explains that the concept of peak oil supply “is derived from geophysicist Marion King Hubbert’s ‘peak theory,’ which states that oil production follows a bell-shaped curve.” Based on his work with Shell in the 1950s, in 1962 Hubbert proposed that global oil supply would begin to rapidly decline once the extraction of new oil resources proved too difficult to achieve. The peak oil point would be reached once the rate of production dropped lower than the rate of consumption.
Hubbert’s 1962 prediction pegged 2000 as the year that global oil production would peak. What he couldn’t predict were the many advancements in oil exploration and extraction technology in the years ahead that would lead to new discoveries and unlock hitherto inaccessible oil resources in existing wells.
In more recent times, rather than supply, peak oil has referred to oil demand entering a phase of terminal decline. According to this demand-side peak oil theory, an irreversible decline in oil demand could be spurred on and accelerated by more cost-effective alternative energy sources.
Peak oil demand predictions
In today’s world, 68 percent of oil demand is attributed to the transport of goods and people, whether by land, air or sea. Another 26 percent of oil demand originates from industrial uses, such as lubricants, plastics and solvents. About 5 percent is used for residential heating, while the remainder (less than 1 percent) is used in electricity generation.
The current calls for peak oil rest on advancements in alternative energy technologies that have the ability to replace oil as the resource of choice for transportation.
One assertion that peak oil advocates make is that the COVID-19 pandemic will have a lasting impact on consumer choices — including less commuting and business travel — which will keep oil demand levels down below those experienced pre-pandemic. Those calling for peak oil also point to growing concern and action in the fight against climate change; dubbed the “green revolution,” this could include a shift away from fossil fuels to renewable energy sources and electric vehicles (EVs).
Rising consumer support, corporate and government investment in clean energy infrastructure projects, as well as advancements in large-scale energy storage and EV battery technology have been put forward as clear signs that this transition is increasingly possible.
According to the Wall Street Journal, Robert McNally, a former advisor to George W. Bush and current chairman of Rapidan Energy Group, has pointed out that several western governments are poised to leverage the pandemic “as an opportunity to rethink energy policy.”
To capitalize on this policy transformation, energy giants Shell and BP are now investing in renewable energy technologies. Energy and Technology states that Shell is building a 10 megawatt electrolyzer at a refinery site in Germany. The largest of its kind, this system will produce hydrogen using electrical energy generated from renewable sources with no carbon emissions.
For its part, BP Chief Executive Bernard Looney has said the company will increase its investment in renewables to up to US$5 billion a year by 2030. More telling is his statement in a fall 2020 report that BP will “not enter any new countries for oil and gas exploration.”
2030 also happens to be the year that Capital Economics predicts the global oil market will reach peak demand. “(The) research firm points out that the massive rise in remote working means many millions of people are likely to commute less often to work by car,” as per Energy and Technology.
“Simultaneously, the widespread adoption of video calling will cut demand for international business travel — so less jet fuel will be needed.”
For its part, global consultancy firm McKinsey & Company forecasts that global oil demand will peak in 2029, while the Organization of the Petroleum Exporting Countries, better known as OPEC, projects that global oil demand will peak in 2040.
Is peak oil fact or fiction?
Of course, historical calls for peak oil have not been without pushback from critics who see drops in oil demand as a natural part of the ebb and flow of a dynamic global market.
“Supply-side ‘peak oil’ theory was always wrong in the past because its proponents invariably underestimated the enormity of yet-to-be-discovered resource that lay beneath the ground in various parts of the world,” David Blackmon, independent energy analyst and consultant, wrote recently in Forbes. “In more recent years, Demand-side ‘peak oil’ theory has always managed to overestimate the ability of renewable energy sources and electric vehicles to displace fossil fuels.”
Also writing in Forbes, energy economist Michael Lynch, a distinguished fellow at the Energy Policy Research Foundation, and president of strategic energy and economic research, highlights the rebound in automotive travel in China post-lockdown and the “growing market share for SUVs” as signals that a strong market for oil still exists.
He points out that the IEA’s January 2021 world energy outlook “included data showing that the market share for SUVs had doubled and tripled since 2010, including in China and India, and dwarfs that of battery electric vehicles.” According to the IEA, internal combustion engine SUVs accounted for a record 42 percent of the global auto market in 2020.
Majid Jafar, CEO of Crescent Petroleum and board managing director of Dana Gas, told Gulf News that for all the hype around EVs, their current level of use has cut oil demand by less than 0.1 percent as the technology has mainly been developed for the light vehicle market. In China, home to the biggest market for EVs, market penetration remains low at about 5 percent of new cars sold.
The trucking, shipping and aviation markets, which constitute the majority of today’s oil demand in the transportation sector, are expected to remain highly dependent on oil. But in the decades ahead it is possible that new alternative energy technologies could bring competition for oil products in this sector. These include large-scale energy storage systems as well as solar and wind power systems.
Oil still has a future in the global energy mix
Regardless of when peak oil happens — today, next year or in the decades to come — it is coming. However, global energy demand remains high, and oil’s role in meeting that demand will not disappear overnight. Rather, we’re in for a gradual decline as the world transitions to a broader energy mix that includes more carbon-free sources.
Perhaps Shell CEO Ben van Beurden said it best: “Even as the world decarbonizes, it will still need oil and gas for decades to come.”
This is an updated version of an article first published by the Investing News Network in 2011.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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