Peak oil, meet peak demand.
The hypothesis that oil production is about to peak is being swiftly replaced by the idea that the world's thirst for crude oil is about to hit a ceiling, posing challenges for firms that face investor pressure to grow.
One idea has it that even crude demand in emerging markets is on track to peak and then steadily decline, as is occurring in much of the developed world today.
"Global oil demand will peak within the next two decades," writes Amy Myers Jaffe, a global energy policy expert at the University of California, Davis, in an op-ed she recently penned for The Wall Street Journal.
Jaffe gives a list of reasons for her bold prediction. She contends that, though the oil industry understands that crude demand is on track to decline in the developed world, it is likely to fall more steeply and more quickly than current assumptions provide. Her forecasting also sees auto ownership in developing countries growing more slowly, and much of it being enjoyed by manufacturers of electric cars rather than gasoline-fueled vehicles. Jaffe also predicts that demand for plastics won't be as great as investors expect.
Not everyone is on board with this line of thinking.
"I think there's a great possibility that, in actuality, demand will be higher than people think," said Michelle Michot Foss, a chief energy economist at the University of Texas, Austin's Bureau of Economic Geology. "Someday there's a peak, but I don't know when that is."
Foss cautioned against making predictions on how much oil the world will likely use in the future. She agrees that softening demand for crude oil is proving a challenge for the industry in the short term, but in the longer run, consumers' appetite for crude may turn out to be stronger than some expect, even in the developed world, as generations churn over and newer consumers emulate the lifestyles of the forebears.
'A near halt' in demand predicted
Projections by government organizations and even major international oil and gas companies suggest Jaffe may be on to something.
Exxon Mobil Corp.'s "The Outlook for Energy: A View to 2040" shows that the company is expecting the world's needs for energy expanding dramatically over the coming decades to 2040, bundling all sources of energy together. But the company thinks that, for residential and commercial users, demand will grow most for electricity, heating and natural gas.
A chart on page 25 of Exxon Mobil's report shows the company expects residential and commercial needs for oil and liquid petroleum gas to stay flat to 2040.
The International Energy Agency (IEA), a club of major energy consuming nations, is forecasting an increase in global crude oil supply to 104 million barrels per day by 2040, according to figures published in its most recent World Energy Outlook. However, IEA says that its outlook suggests "growth in world oil demand slows to a near halt by 2040."
That agency thinks that oil demand is essentially already peaking in China, Russia and Brazil. This coupled with a steady decline in oil consumption in the United States, Europe and Japan will drive the worldwide demand growth figure to a gradual halt in just 25 years, in line with Jaffe's assessment. The trend is being driven primarily by "efficiency measures that play a vital role in holding back global demand growth," IEA says.
Charles Dewhurst, an energy expert at the global consultancy BDO, thinks the IEA is being too pessimistic in its forecast.
"In countries like China and India, we're only beginning to scratch the surface on the demand for gasoline," Dewhurst said. "Car ownership is very, very low, and it's beyond question going to surge once their economies return to stable growth."
In response, peak demand hypothesis proponents point to growing investments in public transportation in Chinese and Indian urban centers and policies openly adopted at the municipal level aimed explicitly at curbing or discouraging car ownership for the sake of better air quality and to alleviate congestion. International action to address climate change would also prove bearish for fossil fuels demand, chiefly coal but affecting oil as well.
And in recent years strong economic growth in emerging markets has rested in large part on their access to developed world consumers. Low birth rates and population aging is seeing populations across the West and Far East advanced economies growing only very slowly or moving in reverse in some cases. With some of the largest developed world markets stagnating or shrinking in size, there are fewer export opportunities in the future, thus growth slows in major export-oriented developing economies, putting a crimp on industries that would otherwise consume vast quantities of petroleum products.
Population growth is slowing in much of the developing world also as urbanization appears to be encouraging lower birth rates. By some demographic estimates up to half of the world's population currently lives in countries where fertility rates are below what would be considered replacement levels. These developments, if they continue or become exacerbated, will likely further quell the globe's appetite for oil.
IEA acknowledges that its prediction of higher production meeting weaker demand hinges on investments in new output in the Middle East. If producers in the Persian Gulf and other regions there don't spend enough on adding new output capacity over the coming years, then the world may actually see a shortfall in crude supplies, the agency cautions. A more prolonged slump in oil prices could foster those conditions.
To this, Foss adds that lower oil prices may eventually lead to rising oil demand, as weaker pricing makes crude and crude-derived products more attractive for industries and consumers.
Policy considerations are in order, too, she said. Lower oil demand may really become a concern for the oil and gas industry if governments deliberately move economies away from crude, possibly by enacting laws aimed at curbing greenhouse gas emissions.
"For views like the peak demand view to work, you have to assume that there's something going on to force people to move oil out of the market," Foss said.
Supplies can meet demand, if they need to
The fall in pricing is already causing forecasters to reassess how much new crude output may come online in the coming years.
This week, Rystad Energy, an industry consulting firm based in Norway, issued notice that it is sharply revising downward its estimate of how much oil output will expand outside the Organization of the Petroleum Exporting Countries (OPEC) over the next five years. Earlier, the firm believed non-OPEC production would grow by 5.5 million barrels per day by 2020, citing the U.S. shale oil boom and growth in Canadian oil sands output. Now Rystad puts that figure at 3.3 million barrels per day, an average increase of 660,000 barrels per day of production growth annually.
The oil price bust that began in the fourth quarter of 2014 is chiefly to blame, analysts there said.
"Only U.S. production has been visibly impacted with the trend turning from 20 percent annual growth during the first quarter of the year to a flat trend in the second quarter," Rystad analysts said in their release. "The shortfall of global offshore production may be steeper if oil prices stay low throughout the year."
And yet, the new general consensus is that there is plenty of oil available to tap should demand prove stronger than pessimistic assumptions, given the technological innovations that helped the United States nearly double its domestic oil production in less than a decade.
Energy intelligence firm IHS sees strong potential for shale oil production outside North America. In a new May report, the company concluded that up to 141 billion barrels of additional oil could be recovered with unconventional methods, including horizontal drilling and hydraulic fracturing.
Up to 6 billion barrels of that total figure could be produced without reliance on hydraulic fracturing, IHS says, getting around fracking bans by using enhanced seismic imaging technologies "to achieve better placement of fractures to take advantage of natural fracturing and other geologic features for maximizing production and avoiding water zones." Analysts there noted that these methods already are being experimented with in places such as France, Tunisia and China with success.
Whether the world will need all of those barrels over the next two decades is an open question. Jaffe says no. The IEA says probably not, but it depends on future investment levels. OPEC expresses confidence that demand for its products will rise.
But it's unmistakable that the recent plunge in oil prices was demand-driven as well as a response to rapidly increasing supplies. Softening demand for oil in China has led to a broader bear market in commodities as economic growth there seems to be rapidly slowing. Proponents of peak oil demand theory also point to demographic trends underway there -- China is aging rapidly and its workforce may be shrinking, a consequence of the nation's long-standing "one child" policy, and mimicking a trend that's also occurring in many developed nations' economies.
Dewhurst says that the world's oil requirements beyond a 20-to-30-year horizon is anyone's guess. Nevertheless, he sees the need for crude rising in the near term.
"Overall, I'm really quite bullish about the future demand side for oil," he said. "I don't believe some of the reports I've seen of oil reaching peak in 10 or 15 years' time. I don't think that's realistic."
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