The oil industry is familiar with the concept of “peak oil supply”; But many find it hard to believe that there is another side to the coin: “peak oil demand.” The idea of declining oil demand may seem puzzling, especially in light of global economic and population growth. This article examines Why the concept of peak oil supply failed to materialize And why should one believe that the concept of high oil demand will become a reality.
The question that arises is why the oil supply did not come in the first place? Simply put, the concept was based on fixed assumptions. In contrast, the oil and gas industry is dynamic, influenced by changing economic conditions and continuous technological developments and knowledge.
Contrary to predictions that Peak Oil might occur in the early 1950s, the world is better off today. World oil reserves in 2018 It has increased from 682 billion barrels in 1980 to 1732 billion in 2022. So the shelf life of oil reserves is still hovering around 53 years!
Rapid technological innovations in 3D seismic imaging, horizontal drilling, fracking and multiple completion techniques have challenged the concept of peak oil. Oil prices have been declining since mid-2014 and reached $30/bbl in January 2016 and are now hovering around $80/bbl. One significant reason for this change is that the rise of US shale oil and shale gas was initially stymied by high oil prices, although it has been delayed for several years and continues to increase. (Figure 1). In addition, technological innovations have significantly reduced the cost of shale oil over time, unlocking vast reserves that were previously held in shale basins due to low permeability worldwide. The discovery of these huge shale oil and gas fields, along with the usual discoveries of new frontier basins, has been made possible by technological advances such as horizontal drilling and fracking techniques. As a result, US domestic oil production has increased from 6.78 million barrels (MMBD) in 2008 to 17.77 MMBD in 2022 (Figure-1). Thus, the debate has shifted from when Peak Oil Supply will occur to when Peak Oil Demand will occur.
Figure-1: BP Statistical Energy Review – June 2023.
Peak oil demand theory
Contrary to theories of peak oil supply, peak oil demand is based on assumptions of continued technological improvements not only in the oil and gas sector, but also in competing energy sources such as renewable energy sources. Additionally, significant structural changes are occurring in the auto industry, which has historically increased demand for fuel. Any changes in the auto industry will inevitably affect global fuel consumption, as 60% of oil is used for transportation. In the year The same industry that dominated the oil industry in the early 1900s when Henry Ford invented the internal combustion engine is now rapidly challenging the oil industry. These changes will undoubtedly disrupt world oil demand.
Since 2010, electric vehicles (EVs) have begun to make their mark on the automobile industry. At first, their slow transition clearly did not concern the oil industry because they did not want to directly challenge the oil sector. However, by 2022, a global fleet of 26 million EVs, although only 1.76% of all cars, indicates that transportation trends are changing.
Advances in technology, declining battery costs, environmental concerns and attractive government policies have spurred traditional car manufacturers to adopt environmentally friendly transportation. At the same time, the evolution of EV infrastructure and fuel-efficient vehicles and rising oil prices have prompted consumers to shift away from internal combustion engine vehicles.
In the year In August 2023, an article titled “EV adoption could spell trouble for oil exporters.” published by OilPrice. We are using the same fuel economy forecast to determine when peak fuel demand will occur. The prediction of EVs and alternative fuel economy scenarios are illustrated in Figure-2 and Figure-3. As a point of reference, total sales of EVs are expected to grow at an annual average of 20%, from 26.2 million in 2022 to 582 million in 2040. Therefore, the fuel savings in 2040 will be 21.42 MMBD compared to the 100 MMBD of global fuel demand in 2022. Significantly, EVs are expected to grow at an average annual rate of 23.4% to 937 million by 2040, resulting in an expected fuel savings of 34.46 MMbd by 2040. In the low case, EVs will grow at an annual average growth rate of 14.34% to 254 million units by 2040, resulting in fuel savings of 9.36 MMBD.
Figure-2: EVS trends towards 2040 under alternative scenarios.
Figure-3: Trends of EVs in fuel economy (MMBD) to 2040 under alternative scenarios.
Figure-4 2040 by the Energy Information Administration (EIA) from the Global Energy Outlook shows the forecast for global oil demand as of October 6, 2021. Based on their assessment, they seem very conservative about EVs entering the automotive sector. The EIA’s benchmark forecast predicts that global liquid demand will average 1 percent annually to 117.2 MMBD in 2040 and 125.9 MMBD in 2050. However, I suspect the EIA will revise their forecast next October. 2023 report.
Taking the EIA reference fluid demand forecast and reducing our expected fuel savings is highlighted in Figure-4 due to the penetration of EVs. Based on the reference case, peak oil demand is expected to take place in 2027 and for the peak scenario, it will slip a year earlier to 2026.
Based on Statista’s oil demand outlook, the reference peak is expected between 2025-2028, with the peak expected to occur in 2025 (Figure-5).
E-Figure-5: Global Oil Demand Outlook 2045 | Statista
According to the report of the International Monetary Fund (IMF), the world’s oil demand is expected to reach the highest level in the region 2040 or “very soon” 1. However, the International Energy Agency (IEA) has Planned Global oil demand is expected to remain high over the next few years and annual growth will slow to just 0.4% in 2028. The Organization of the Petroleum Exporting Countries (OPEC) has estimated that global oil demand will reach 109.8 million barrels per day In the year By 2045, transportation fuels such as gasoline and diesel are expected to remain the most perishable commodities 3. McKinsey After more than 30 years of steady growth of more than 1 percent per year, oil demand growth slowed and peaked in the late 2020s. 2029. Bloomberg In a recent study, they predicted that there will be a huge demand for oil by 2027.
Based on our assessment and the pace of EV penetration, demand for oil should peak in the current decade. This is again a timely reminder for oil exporting countries, although oil demand continues to play an important role in the global primary energy mix and global economic growth, its role is diminishing over time. Major oil-exporting countries have taken appropriate strategies to incorporate their high dependence on oil revenues in a timely manner. Those who ignore this change may find it out of date when they finally wake up to the changed landscape.
By Salman Ghuri and Faris Ahmed
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