Is Peak Demand “More Than a Feeling?”

By Robert Auers and John Auers

It wasn’t long ago that many were talking about impending crude oil shortages, $150+ prices and the inevitability of a Peak Oil (supply) environment. However, the “shale boom” and other technology driven developments, which have expanded economic oil reserves and drastically driven the cost to find and produce petroleum, have shifted the conversation to the opposite extreme.  Now everywhere you turn the conversation has shifted to worries about “Peak Demand.”  These conversations have been further fueled by worries about hydrocarbon caused climate change and a push to increase electric car adoption despite low oil prices.  We’ve certainly all heard the news of governmental actions around the world banning new internal combustion engine (ICE) vehicles sales at dates ranging from as early as 2025 (in Norway) to 2040 in various countries (and even local governments), especially in the developed world.  Even developing countries, which have led the world in petroleum demand growth, have joined this conversation, with China leading the way. Nonetheless, current demand growth seems to continually exceed expectations, with IEA again in September upping its 2017 demand growth forecast from 1.6 MMBPD to 1.7 MMBPD, which continues a trend of strong growth ever since oil prices collapsed in 2014.  This strong growth is not only taking place in the developed world, but also in OECD countries that not long ago were predicted to see a never ending downward trajectory in petroleum demand. So, with most of us working in oil and gas, should our concern over peak demand be “more than a feeling,” or should we just regard it as a passing fad.

“I lost myself in a familiar song”

This isn’t the first time that the world has been concerned over the possibility of peak oil demand.  In fact, the situation in the early and mid-1980s was not all too different than today’s.  At that time, the world was awash with crude oil from the emerging North Sea fields and OPEC (especially Saudi Arabia) was fighting for market share after spending years trying to balance global supply and demand through production cuts.  Meanwhile, fuel economy had significantly improved and consumers were shifting away from gas guzzling trucks and muscle cars to fuel efficient economy cars.  Additionally, research was being poured into developing alternative fuels such as liquids from coal and gas, the original “shale oil”, and the first major movement towards ethanol (primarily in the U.S. and Brazil).  Even electric vehicles were starting to enter the conversation in those early years after the Arab oil embargoes.  In fact, most analysts were predicting that U.S. gasoline demand had “peaked” in 1978 (at levels almost 2 million BPD below 2016 demand).  However, the low price environment that developed as a result of this earlier oil glut led to strong demand growth beginning in the early 1980’s, even in the developed world, as consumers (especially in the U.S.) deprioritized fuel economy, leading many to switch back from cars to light trucks.   The 1978 gasoline “peak” was exceeded by 1993 and kept rising throughout the 1990’s and well into the new millennium.  However, history seemed to be repeating itself after high oil prices and a worldwide recession led to falling demand post-2007 and many analysts again forecast that U.S. petroleum demand, particularly for gasoline had “peaked’ in 2007.  They have certainly been wrong again in regards to gasoline, as 2016 gasoline demand set a new record and 2017 consumption seems on pace to surpass those numbers again.  Total U.S. demand has also shown strong growth in the recent low price environment, although it hasn’t quite exceeded the 2007 levels (see the graph below).

“And I begin dreaming”

So what does the future hold; are we going to continue to see demand growth or will peak demand proponents finally be correct (at least in terms of the developed countries)?  Despite the similarities to previous periods, this time is a bit different.  The rise of climate-change theory has created an important additional motive to curb fossil fuel usage, regardless of supply and economics.  As a result, governments across the world have initiated policies dis-incentivizing or (as mentioned in the intro) outright banning fossil fuel powered vehicles.  Meanwhile, electric cars have made important technological advancements and noticeable, though still relatively small, numbers of EVs are on the roads today.  Still, most consumers (especially the middle class) will make the decision of ICE vs EV based on their individual economic situation, and we see few cases (barring those in select countries with heavy subsidies) where an EV can actually be the economic choice today.  Furthermore, most ICE bans are proposed for 2035 and 2040, giving plenty of time for these governments to delay or altogether or cancel these bans before their implementation.  In addition, a government mandate cannot force technological progress.  Case and point is cellulosic ethanol in the U.S.  The original RFS 2 proposed a mandate of ~358 MBPD of cellulosic ethanol be blended into transportation fuel in 2017.  The actual number will likely be closer to 358 BPD (probably less)(Roughly 98% of cellulosic ethanol RINs generated today are from landfill gas, and these still fall well short of volumes proposed in the original law.)  Nonetheless, technology is improving and batteries are getting cheaper and this, in our view, is a much more credible threat to petroleum demand.  Lastly, in a recent blog we discussed some of the improvements likely coming to the ICE over the next 20 years, which provide a mixed signal on the future of petroleum demand.  While increased efficiency obviously directly decreases demand, it also slows the adoption of EVs and encourages consumers to buy larger vehicles, partially offsetting the effect of increased efficiency.

However, by far the most important catalyst to future petroleum demand growth is economic progress in the developing world.  As demand growth slows in China, due largely to slowing economic growth and a shift to services (as opposed to heavy industry), demand growth is accelerating in India and other countries. Conversely, despite the recent growth in demand across the OECD, we believe that demand has already peaked in the developed world.  It seems almost certain that European demand will never pass its peak reached prior to the great recessions, and while it is a bit less clear as to whether U.S. demand will ever pass its peak reached during the same time period, we view it as unlikely.  Given this outlook as a backdrop, we certainly don’t expect to see peak demand any time before 2035 and probably not until sometime after 2040.  Still, we do expect demand growth to decelerate considerably over this period, and are potentially seeing “peak demand growth” this year or over the next couple of years. The table below lists forecasts for peak oil demand from various other sources.  Note the wide range of estimates, with Shell predicting a peak as early as 2025, while others such as Exxon and Chevron stating publicly that “no peak is in sight”.

TM&C constantly monitors changes and projected changes in pricing and supply and demand across the globe for all petroleum products.  Our projections take into account changing rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand.  We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook and our various other studies. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting us, visiting our website at turnermason.com or calling Shanda Thomas at 214-754-0898.

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