Peak demand for oil is the big new thing. True, the International Energy Agency, in the annual World Energy Outlook it released earlier this month, didn’t envision a peak coming before 2040 barring a big acceleration in anti-climate-change efforts. But at least it’s talking about the possibility, and forecasting a slowdown in demand growth in the meantime.
Others think the big day is coming much sooner. Simon Henry, the chief financial officer of Royal Dutch Shell, recently predicted a demand peak “between five and 15 years hence.” And as Bloomberg’s Javier Blas and Laura Blewitt pointed out last week, even the IEA thinks that demand from passenger cars, long the biggest users of oil, has already peaked.
So that’s pretty exciting! The peaking of oil demand would mark a major historic turning point. Still, it’s impossible not to get a little wary when the words “peak” and “oil” are thrown together. Here, for example, is something I wrote nine years ago, when concerns about “peak oil” (meaning peak oil supply) seemed to be migrating from the apocalyptic fringe to the mainstream:
The chief executives of ConocoPhillips and French oil giant Total both declared that they can’t see oil production ever topping 100 million bbl. a day. The head of the oil importers’ club that is the International Energy Agency warned that “new capacity additions will not keep up with declines at current fields and the projected increase in demand.”
What happened to make these worries go away? The biggest thing was a global economic downturn in 2008 and 2009 that threw off everybody’s demand forecasts. But increases in oil supply — notably in the U.S., where crude-oil production went from 5 million barrels a day in 2008 to 9.4 million barrels a day in 2015 — have played a big role, too. World oil production is currently at 97.2 million barrels a day (up from 85.6 million barrels a day in 2007), and could surely go higher if demand were higher.
That makes me wonder what could go wrong with the forecasts of peak oil demand, or just slowing demand growth. The baseline IEA forecast is something called the “new policies” scenario, which assumes that governments around the world will follow through with current pledges to reduce carbon emissions and increase the use of renewable energy. Here’s how that scenario breaks down for oil demand:
The “passenger vehicles” category in this chart includes motorbikes and buses, which the IEA expects to need more fuel in 2040 even as passenger car demand declines by 600,000 barrels a day. The main demand gains foreseen by the IEA are from the petrochemical industry, aviation, and the trucks, trains and ships that move freight around the world.
The most obvious risk to this scenario is an unraveling of the global effort to reduce carbon emissions, the chances of which have clearly risen with the election of Donald Trump. The IEA actually has a “current policies” scenario that more or less covers this possibility, with oil demand rising from 93.5 million barrels a day in 2015 to 117 million barrels a day in 2040 (versus 103.5 million barrels a day in the new policies scenario), with no peak in sight. That would be great news for oil producers, but rising oil prices — not to mention rising global temperatures — could make it pretty complicated for everyone else.
But there are also risks in the other direction that could make the demand peak arrive sooner, and more abruptly, than the IEA and maybe even the people at Shell expect. The IEA actually has a “450” scenario that envisions world oil demand falling to 73.2 million barrels a day by 2040 if governments around the world succeed in “limiting concentration of greenhouse gases in the atmosphere to around 450 parts per million of CO2.” But I’m thinking more of forces that don’t require major breakthroughs in global governance.
Global trade has already plateaued, and the rise of nationalist politicians such as Trump would seem to make outright declines in trade at least as likely as a big rebound, thus depressing freight and maritime demand for oil. Because of the trade slowdown and other issues, the emerging-market countries expected to drive future oil demand growth may not be able to drive it all that fast.
In the same vein, improvements in electric-vehicle technology, coupled with continuing changes in how we get around — from ride-sharing services to self-driving cars — could depress passenger-car fuel demand even more than forecast. And the IEA, which has repeatedly underestimated the growth of renewable energy sources such as wind and solar, may be doing so yet again.
Energy market forecasting is hard. I certainly couldn’t say with confidence what’s going to happen next for oil. But I do have a suspicion that it could be really interesting.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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