Exploring Hydrocarbon Depletion
Page added on January 22, 2017
The current fashionable theme in energy is ‘peak oil demand’ and the accompanying possible stranding of fossil fuel resources, with the resulting damage to the equity value of producing companies. This post will discuss reasons to be wary, at least of some of the arguments. A subsequent post will discuss more realistic rationales—and signposts—towards peak oil demand.
Unlike the earlier ‘peak oil’ scare, which I showed in my book to be without foundation, peak oil demand is theoretically sound, in the sense that there is nothing which requires the world to continue to use ever-increasing amounts of oil. Peak oil demand theorists sometimes cite the adage “the stone age didn’t end because we ran out of stones,” which represents the aspect of resource economics that higher prices or technological advances could lead to displacement of one resource by another. Of course, the rock business remains quite robust so the ‘end’ of the stone age was not very meaningful—at least for stone.
Crushed Stone Consumption in the US (million metric tonnes)
And the fact that many of those predicting peak oil demand also embraced the peak oil supply belief is hardly comforting. Prominent advocates like Joe Romm of thinkprogress.org don’t seem to notice the irony of rejecting their previously-held ‘reality’ of peak oil supply while now embracing peak oil demand. As he said last year, “The idea of peak oil supply — the notion that our reach (demand) for oil would exceed our grasp (global supply) — is dead. It appears instead that homo sapiens might just be wise enough not to over-reach, that we may voluntarily let go of oil…” Bearing in mind that in 2009 he was saying “…I have blogged endlessly on the painfully obvious reality that we are at or near the peak…” and you get the sense both that some proponents are less than diligent in promoting consistent arguments but also somewhat shameless about their analytical reversals. [emphasis added]
As with the belief in peak oil supply, peak oil demand depends in part on observers misinterpreting short-term developments as indicating permanent trends. Although perhaps forgotten now, high oil prices in the past decade weakened oil demand suggesting that, in some areas, a demand peak had occurred. U.S. gasoline demand, for example, peaked and declined after 2007, as consumers switched to smaller and/or more efficient vehicles. However, the continuation of this depended significantly on prices remaining high, which most considered certain at that time. (I have been called an idiot for suggesting $50-60 was the sustainable long-term price when $100 was the consensus forecast.)
US Gasoline Demand (tb/d)
There are serious analysts discussing the idea of peak oil demand, but many of them are simply opponents of fossil fuels and/or the oil industry, techo-optimists, or those worried about climate change. The first is obviously nothing more than an ideological bias but the latter two should not be dismissed out of hand.
The techno-optimists in this case are not those who think that more improved nuclear reactors will become a major source of energy, or that progress in carbon capture and sequestration will make it attractive, but rather that electric vehicles will soon become a dominant market force. Richard Branson says in fifteen years “every car on the road will be electric” and one headline noted “Superior electric cars are on their way, and they could begin to wreck oil markets within a decade.”
The irrational exuberance leads many to ignore warning signs. Observers like Joe Romm praise the Chinese electric vehicle program because “The electric vehicle revolution is now as unstoppable as the renewable revolution. China understands that fact better than any other country.” (Perhaps he should read: “Global Funding for the Solar Sector Plummets 64% in 2016”)
Romm does mention the fact that nearly 60% of the cost of an electric vehicle in China is covered by subsidies, but doesn’t seem to realize this isn’t a positive element, but rather a sign of significant political risk for the industry. Indeed, news organizations feature warnings like “much of that growth comes from generous government subsidies and license plate restrictions in tier-1 cities” and “One suspected strategy involves manufacturers selling faulty or incomplete cars to related parties who pocket the subsidies and then return the cars.” This is a very different story from that told by the more ideological peak oil demand advocates.
There is no doubt that battery technology has improved in the past several decades, but proponents of electric vehicles ignore the many deficiencies that remain, waving them off as inconsequential or offset by externalities. The challenge is still in creating a vehicle that consumers want, not one that they will buy if paid exorbitant amounts of money by the government. Since it appears likely that the lithium-ion battery will not be the successful power package for electric vehicles, buying more of them now will hardly advance the technology.
For its part, climate change is a real concern which is likely to prompt at least some policies aimed at reducing various greenhouse gases, including petroleum but first, presumably, coal. Unfortunately, global efforts to rein in greenhouse gas emissions have so far been minimal, despite many agreements and much publicity to the looming danger (at least as some imagine it). While it is quite conceivable that climate change policies in the OECD will mean lower demand than a business as usual scenario, given that most oil use in the developed countries is for transportation, and there is no good replacement for private vehicles as of yet, petroleum is going to be the most difficult energy source to displace.
Since the world still relies on coal for 34% of its fossil fuel energy, there is a long way to go before petroleum consumption needs to be reined in. Given that electric vehicles are one of the most expensive ways to reduce GHG emissions, it seems unlikely that governments will embrace large-scale promotion of them, cutting support just as many are now doing for solar power. Replacing coal with gas and nuclear should be a priority for at least a decade, and though governments often push technologies and policies that are, ahem, not optimal (coal gasification, fast breeder reactors, ethanol, etc.), in the long run, the importance of the issue and the massive costs involved would seem to militate for a bias towards better cost-benefit outcomes than lithium-ion vehicles.
At present, most of those trumpeting the potential for peak oil demand by 2025 are following the peak oil supply playbook: highlight anecdotes about predictions, no matter how conditional, ignore warning signs, assert the inevitability of your projection, and provide relatively little solid analysis. On the other hand, those like the IEA who consider serious questions like declining population growth and improved automobile efficiency, usually put the peak further into the future, beyond the point of effective forecasting. A later post will address these arguments.