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Fixation on timing of peak oil is ‘misguided’

Fixation on timing of peak oil is ‘misguided’ thumbnail

The electric car revolution and stricter global rules on emissions have focused debate in the energy sector on when decades of growth in oil demand will eventually peak. But Spencer Dale, chief economist at energy major BP and former Bank of England policymaker, has challenged the industry to come up with a better question. In a co-authored report with Bassam Fattouh at the Oxford Institute for Energy Studies, which reignited discussion in the oil industry this week, they argue the sector’s fixation about the timing of peak demand is “misguided”. Rather, they argue that the wider ramifications of any peak are really what the industry needs to grapple with. For example, how big oil producer countries reconfigure their economies and energy policies to cope with an industry in structural decline, even if oil consumption remains robust for years to come. And, what this might means for oil prices. Forecasts for when a peak occurs span a 25-year period, with those estimating an earlier timeframe basing predictions on the rapid adoption of electric cars and harsher environment regulations. BP’s base case has oil consumption growing until 2040, while rival Royal Dutch Shell said a peak could arrive in the next 15 years. “Peak oil demand signals a break from a past dominated by concerns about adequacy of supply,” the paper says. Any peak in oil demand, the paper argues, could set off increased competition among oil rich countries as they rush to pump barrels out of the ground to avoid stranded resources. This could also spur a fall in oil prices and lower extraction costs.

This is one result of the energy “paradigm shift”, from one of perceived “scarcity” of recoverable resources to one of “abundance”, the paper adds. The paper acknowledges the difficulty big producers face in cutting reliance on oil income and changing from a mentality of maximising revenue — such as Opec’s attempt to cut production to bolster oil prices — to pursuing market share, by selling as many of its barrels as possible before a severe demand decline. But here lies a point of contention, even for those who support the authors’ broad view. Jamie Webster at the BCG Center for Energy Impact says the argument that countries will strive for higher volumes at lower prices, to take advantage of their cheap costs of production, would assume every nation is thinking for the long-term. “History tells us that it’s all about revenue maximisation for these producers, however they get it, even if it is through enacting production cuts as they are now,” says Mr Webster. Separately, the paper argues if oil demand flattens out, or even declines gradually, the industry will still require substantial capital expenditures to recover large quantities of oil for decades to come. The decline rates of existing fields means that the industry will need to replace the equivalent of 3 per cent — or more — of global production each year just to stand still, says the paper. Such an outcome, however relies on investor confidence in financing the industry. This is why the timing question matters. “When that shift occurs, from a growing industry to one in decline, you change investors’ perception,” says Jason Bordoff at Columbia University’s Center on Global Energy Policy.

Despite the paper arguing for a strong need to invest in future production, a structural downswing in the industry, would see investors demand higher rates of return, says Mr Bordoff. This could impact on the cost of capital for oil companies, which feeds into the availability of funds for new production. “It becomes a self-fulfilling prophecy — tighter markets, followed by higher prices, and this would again lead to another global push away from oil into other fuels,” Mr Bordoff adds. Recommended Oil supply curbs set to continue throughout 2018 Opec and Russia boost oil prices after extending cuts Opinion — Opec: shale not hardy Another point emphasised by the paper is that oil as a transport fuel is “unlikely to be materially displaced for many decades.” But, Cuneyt Kazokoglu, head of oil demand at FGE, says the report misses the potential for governments to make radical changes on climate policy, energy efficiency and fuel substitution. “What if China says they are going to ban combustion engines? What if a country has oil but governments don’t allow you to use it?,” says Mr Kazokoglu. His comments come as the UK, last year, followed France in announcing it will ban the sale of all new petrol and diesel cars by 2040. Regional policy differences could also impact on demand for certain refined fuels, meaning some parts of the barrel “peak” before others, Mr Kazokoglu adds. This thinking has spurred Opec’s largest producer Saudi Arabia to invest in chemicals to “future-proof” its oil riches. “The significance of peak oil demand is more nuanced. It’s not about when it happens, I agree with the authors of the report on that, but it’s about where it peaks and which fuels peak,” said Mr Kazokoglu. “One big picture view about peak demand is not enough.”


18 Comments on "Fixation on timing of peak oil is ‘misguided’"

  1. Davy on Sun, 18th Feb 2018 8:40 am 

    Not one word about the economy because, you know, it has been and always will be, for a cornucopian. Cornucopians forget that civilization must be paid for. Cornucopians dismiss hard immediate limits because of substitution and innovation. They acknowledge planetary limits but say they are far off problems. Cavalier 2040 forecasts are very vague but a cornucopian will discuss them as if they are tomorrow. Cornucopians believe technology and development will overcome the tendency of civilization to decay and decline.

    Cornucopians are betting on the come. Betting on the come involves a personal psychological position that does not correspond to the reality of statistics. I am fine with betting on the come. Let’s have some optimism but science call for realism too and a realistic look at what we are up against is not solid optimist. It is a mix of optimism and pessimism with different time manifestations. We can and should have short term optimism but projecting that out further than a few years is fools bet. All runs end.

    “Gambler’s ruin”
    “The original meaning is that a persistent gambler who raises his bet to a fixed fraction of bankroll when he wins, but does not reduce it when he loses, will eventually and inevitably go broke, even if he has a positive expected value on each bet.”
    “Another common meaning is that a persistent gambler with finite wealth, playing a fair game (that is, each bet has expected value zero to both sides) will eventually and inevitably go broke against an opponent with infinite wealth. Such a situation can be modeled by a random walk on the real number line. In that context it is provable that the agent will return to his point of origin or go broke and is ruined an infinite number of times if the random walk continues forever.”
    “The result above is a corollary of a general theorem by Christiaan Huygens which is also known as gambler’s ruin. That theorem shows how to compute the probability of each player winning a series of bets that continues until one’s entire initial stake is lost, given the initial stakes of the two players and the constant probability of winning. This is the oldest mathematical idea that goes by the name gambler’s ruin, but not the first idea to which the name was applied.”
    “The most common use of the term today is that a gambler playing a negative expected value game will eventually go broke, regardless of betting system. This is another corollary to Huygens’ result.”
    “The concept may be stated as an ironic paradox: Persistently taking beneficial chances is never beneficial at the end. This paradoxical form of gambler’s ruin should not be confused with the gambler’s fallacy, a different concept.”

  2. MASTERMIND on Sun, 18th Feb 2018 9:19 am 

    As M. King Hubbert (1956) shows, peak oil is about discovering less oil, and eventually producing less oil due to lack of discovery.

    IEA Chief warns of world oil shortages by 2020 as discoveries fall to record lows

    Saudi Aramco CEO sees oil shortage coming as investments, oil discoveries drop

    Peak Oil Vindicated by the IEA and Saudi Arabia

  3. MASTERMIND on Sun, 18th Feb 2018 9:19 am 

    Existing oil reserves are scheduled to begin a catastrophic crash within 1 to 3 years. When it hits the economic and social damage will be catastrophic. The end of Western Civilization, from China to Europe, to the US, will not occur when oil runs out. The economic and social chaos will occur when supplies are merely reduced sufficiently….

  4. MASTERMIND on Sun, 18th Feb 2018 9:20 am 

    The End of the Oil Age is Imminent!

    Recently, the HSBC oil report stated that 80% of conventional oil fields were declining at a rate of 5-7% per year. This means that there will be an oil shortage of ~30 million barrels per day by 2030 and ~40 million barrels per day by 2040.

    What is mentioned far less often is that annual oil discoveries have lagged annual production since the 1980s.

    Now, this problem has nothing to do with the recent decline in the oil price, which started in 2014. This has been an on-going problem for the past 30 years. Now, the IEA is predicting oil shortages by ~2020 due to declining exploration.

    Here, the IEA blames this problem on the low oil price. But, this problem started in the 1980s. The problem is geological: we are running out of conventional cheap oil. Shale and tar sands are not the answer, either. Those resources are far too expensive, compared to conventional oil, because the global economy is based on cheap conventional oil. Expensive oil is not a replacement for cheap oil.

    Based upon the HSBC report and the IEA, the End of Oil Age will start around ~2020: there will be a dramatic economic depression due to exhaustion of cheap oil. This will cause a global economic collapse.

  5. Cloggie on Sun, 18th Feb 2018 9:58 am 

    “rival Royal Dutch Shell said a peak could arrive in the next 15 years. “Peak oil demand signals a break from a past dominated by concerns about adequacy of supply,” the paper says. Any peak in oil demand, the paper argues, could set off increased competition among oil rich countries as they rush to pump barrels out of the ground to avoid stranded resources. ”

    Hahaha, who would have thought! Oil prices plummeting in the face of peak oil DEMAND!

    All oil companies dumping their last reserves because they don’t want to be seen as the one holding the greasy bag.rofl

    Oil fire sale is next before we all switch to renewables.

    Richard “the party is over” Heinberg just got 10 cm smaller.

  6. Boat on Sun, 18th Feb 2018 10:19 am 


    None of that makes any sense. There will plenty of demand at high levels as transportation declines it’s fuel use. Transportation is like 60% of oil consumption if I remember right.

    If oil goes into a glut and prices drop producers will cut producing and drilling till the market comes back in balance. Just like the cycle we just went through

  7. Boat on Sun, 18th Feb 2018 10:21 am 


    You say last reserves? Lots of reverses, go to Venz and look at the idle rigs.

  8. rockman on Sun, 18th Feb 2018 11:12 am 

    “…as the UK, last year, followed France in announcing it will ban the sale of all new petrol and diesel cars by 2040.” What politicians say today will happen in 2040 is not the least bit relevant: they won’t be running the govt then. The govt, as elected by the voters, at that time will make such decisions.

    IOW for the vast majority of politicians today: BAU.

    If today’s politicians want to have an impact they should be pushing for a phased in ban beginning is several years. But they won’t do that because they would rather get elected then try to make a meaningful difference.

  9. onlooker on Sun, 18th Feb 2018 11:16 am 

    Actually, MM, many links appear very credible. And Davy is right that Peak Oil is ultimately an Economic crisis. As each day passes and drastic changes and transitions are NOT occurring, the less feasible any solution can or will come to avert economic collapse scenarios. The Cornies here can clamor about the comming so and so revolution but it is appearing each day more like Nero playing the harp while Rome burnt.

  10. MASTERMIND on Sun, 18th Feb 2018 11:55 am 


    UC Davis Peer Reviewed Study: It Will Take 131 Years to Replace Oil with Alternatives (Malyshkina, 2010)

    University of Chicago Peer Reviewed Study: predicts world economy unlikely to stop relying on fossil fuels (Covert, 2016)

    Solar and Wind produced less than one percent of total world energy in 2016 – IEA WEO 2017

    Fossil Fuel Share of Global Energy since 1990 – BP 2017

    Once again you are an idiot!

  11. MASTERMIND on Sun, 18th Feb 2018 11:59 am 


    IEA Sees No Peak Oil Demand ‘Any Time Soon’

  12. twocats on Sun, 18th Feb 2018 12:06 pm 

    if everything is so cheap and abundant why is health care so expensive, and housing, and education, and on and on. its because these large structural entities require resources and input costs. think about the phrase “the cost of living” – literally that cost has gone up. i know there are a lot of straw men that one could blame for that. Like debt and the need for a rate of return. but even that is peak oil related. if energy were so abundant debt would be easier to service because their would be surplus (free) energy available to create profits. without that you have to get people to do shit – and people require upkeep. robots require spare parts. hospitals require machines and sterilization and sutures. schools require books, and computers, and new buildings to attract students, and stadiums. and shit that used to be easy to build now cost millions and millions or billions of dollars. if you talk about billions enough at some point you are talking about real things, real world things that require real world things to happen. not your mind fantasies were people are going to be pouring oil onto the ground because its so invaluable. its utter and complete bs and anyone who took even an ounce of this article as plausible is just not mentally fit to be on the blog.

  13. Boat on Sun, 18th Feb 2018 12:13 pm 

    The middle east has a history for voluntary oil cutbacks or wars that cause shortages. The world has always had plenty of oil. They just can’t always get the Texans to it.

  14. Boat on Sun, 18th Feb 2018 12:25 pm 


    An oil rash could happen at any time because of non cooperation amongst humans. If this were a peaceful world fracking would have never happened because there was plenty of lower cost to produce oil around.


  15. Frank on Sun, 18th Feb 2018 4:43 pm 

    2026 at the latest. The future is just too efficient and powerful.

  16. Antius on Mon, 19th Feb 2018 7:52 am 

    Peak demand isn’t the cosy thing the mainstream media seem to think it is. The implication seems to be that we don’t need to worry about supply, because we are all becoming more efficient at using oil and are progressively switching to electric vehicles. Hence demand is peaking because we don’t need so much.

    That is absolutely not what has happened so far. Demand has fallen in developed countries since 2007, because fewer people (especially young people) can afford to buy a car or travel by air. The price of oil has fallen because developed countries can no longer afford to pay $70+/barrel and the amount available beneath that price level is shrinking. You could call that peak demand if you wish, but it is hardly reassuring. There is a world of difference between not needing something and being too broke to afford it.

  17. Davis Waldo on Mon, 19th Feb 2018 9:53 am 

    Let’s use Chesapeake, the original innovator in fracking as a proxy for the long term economics of their business model of massive debt, technological innovation, and opening up new energy resources for society. Their stock is under $3/sh. Eps -.
    Under a fed, govt, wall Street, military industrial model of us power, additional capital keeps being pumped into this capital destruction machine to prove how strong the US is. See Art Berman. Now the Fed is backing off QE, investors in lt us govt securities are able to bargain for positive, risk-adjusted, real rates of return. This will flow through all asset classes. The miracles free money can do will be exposed as bs when investors start being able to demand dividends and return of capital.

  18. dave thompson on Mon, 19th Feb 2018 2:21 pm 

    I still do not understand how people will insist that driving an EV is going to slow the growth and use of oil. The refining process of crude always will still produce gasoline and the gasoline will be sold some place in some market some where. EV cars are just a small part of the overall. Even if for example the US went to 100% EV. Industrial Civilization will still need to refine crude into the component products for all of the other things that humans do.

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