Peak Oil is You
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Page added on November 23, 2013
Oil’s biggest problem? A new ‘peak’ worry
A fashionable, if annoying, business term is “peak.” Name the commodity or resource, slap “peak” in front of it, and all of a sudden you have a crisis that can generate a few thousand disaster headlines. In recent years, we have been treated to peak oil, coal, gold, water, wheat – even peak soil. The only thing that wasn’t peaking was stupidity.
Today, we can add a fresh new one: peak demand, as in oil demand.
Five or six years ago, peak oil was the peak worry as prices galloped ever higher. Surely, the world was running out of oil as China and the rest of the growth-mad developing world discovered the joys of sitting in traffic as their SUVs slurped gasoline like Oktoberfest beer; the price said as much. As it rose to almost $150 (U.S.) a barrel, Goldman Sachs boldly predicted that $200 oil was possible.
Then, suddenly, it wasn’t possible. The financial crisis and deep recessions everywhere sent the price plummeting. You don’t hear much about peak oil anymore, even though both the Texas and Brent prices are treading on either side of $100, well more than double the low reached in 2008 and 2009. For that, credit – or blame – slowing global growth, rising exports from Iraq and Libya, technology that can suck oil out of inconvenient places and surging U.S. shale-oil production.
If you’re an oil company or investor, it’s probably dawning on you that peak oil – the point at which geology and technology dictate the maximum rate of production, after which decline sets in – will not determine future oil prices and, therefore, the value of your energy portfolio. So what will? Peak demand could, and it’s a credible theory that is gaining a following. In a recent interview, John Browne, the former chief executive of BP, said, “Oil prices will be limited by peak demand, not peak supply.”
By that, he means the point will come when the world simply doesn’t need ever-rising amounts of oil. At about $100, oil prices are still high enough to encourage conservation. Cars are becoming far more fuel-efficient and are being driven shorter distances. Natural gas, in apparently infinite supply, is increasingly being used as transportation and heating fuels (when’s the last time you heard of someone installing an oil furnace?). Electric cars are entering the auto mix and alternative fuels, from Brazilian sugar-cane ethanol to biodiesel (made from vegetable oils or animal fats) are entering the fuel mix. At the same time, governments in China and elsewhere are encouraging the transition to less-carbon-intensive cities, if only to keep their citizens from dying of lung cancer.
The world consumes about 89 million barrels of oil a day. Analysts at Citi think demand will level off at about 92 million barrels as long as the fuel efficiency for cars and trucks keeps improving by 2.5 per cent a year. “The tipping point for oil may come much sooner than the markets are expecting,” Citi’s commodities team, led by Ed Morse, said in a report.
BP is more bullish on demand: It expects it to go to 104 million barrels a day by 2030.
The peak demand theory, while plausible, is a little too pat. That’s because the oil markets face a bigger known unknown (to borrow an expression used by former U.S. defence secretary Donald Rumsfeld) in the form of unburnable carbon. What is known is that burning carbon is raising carbon-dioxide levels to potentially catastrophic levels as the planet warms. In May, an atmospheric station in Hawaii recorded an atmospheric reading of 400 parts per million of CO2 equivalent, a 25-per-cent increase over 55 years and a rate of increase three times faster than it was in the early 1960s. Climate scientists say the CO2 must be stabilized at 450 ppm to limit global warming to two degrees above the temperature that prevailed before the Industrial Revolution.
What is not known is how much oil and coal will have to be left in the ground to prevent runaway carbon-dioxide buildup in the atmosphere. Earlier this year, the Grantham Research Institute on Climate Change at the London School of Economics and a not-for-profit research group called Carbon Tracker issued a paper titled “Unburnable carbon 2013: Wasted capital and stranded assets.” It concluded that about two-thirds of the Earth’s estimated oil, gas and coal reserves would have to stay in the ground if the two-degree goal is to have any chance of being achieved. The International Energy Agency agrees.
Some pension funds are already worried that the enormous stored wealth of the hydrocarbon players – their reserves – is a mirage. Last month, the managers of 70 pension funds with assets of more than $3-trillion wrote a letter to the top 45 oil, gas, coal and utility companies asking them to explain how climate change would affect their business. “As long-term investors, we see the world moving toward a low-carbon future in which fossil-fuel reserves that companies continue to develop may actually become a liability,” Jack Ehnes, head of California’s State Teachers’ Retirement System, said in a Washington Post article.
Put the peak demand and a yet another “peak” – peak carbon – together and you have a scenario that should send waves of anxiety through oil and coal companies and their investors. The share prices do not reflect either of the two risks, suggesting that investors rightly do not believe oil use will fall, or that they’re deluded. Energy was always a volatile investment, prone to cycle swings. The next swing could be down forever.
7 Comments on "Oil’s biggest problem? A new ‘peak’ worry"
rockman on Sat, 23rd Nov 2013 1:18 pm
“By that, he means the point will come when the world simply doesn’t need ever-rising amounts of oil” And “…peak oil…will not determine future oil prices and, therefore, the value of your energy portfolio.”
Where do you begin to rip apart this piece of crap article? LOL. The world is currently desperately in need of cheaper energy including oil. But that has always been true. When oil slipped to $10/bbl in ’86 there were still some economies that couldn’t meet their “demand”. Today every economy not dependent on oil export revenue is stifled to some degree by the price of oil. Some, like China, are handling it better. Others, like the PIGG’s are not. The world has a huge “need” for hydrocarbon derived energy today and will far into the future IMHO. But how much it consumes is still determined by price and not “demand”. And as economies such as China’s continue their growth pattern it will need ever increasing amounts of oil. And as long they can pay the bill they will satisfy that “need”. But even for economies like China’s only up to the point it can afford the price.
The essence of global PO is not the date it occurs. Never was and never will be IMHO. It’s the dynamic interplay of demand, price, deliverability and economic growth. That dynamic is determining prices today at $100/bbl just as it did in ’86 at $10/bbl. This dynamic system will determine the future price of oil and the value of any oil company’s portfolio…as it always has in the past.
Demand, which is better described as consumption IMHO, is dependent on price regardless of the economic conditions. What price any economy can pay determines it’s consumption. And the price of oil will be determined by those economies that can handle the higher prices. “Demand” at $30/bbl would seem to be greater than at $100/bbl yet the world is consuming more oil today at the higher price than it was just 10 years ago at the lower prices. As the world has been approaching that magical global PO date (whenever it might be) both “demand” and prices have increased. That’s not an opinion but black and white statistics. While this might be difficult for an economist to explain it is still an undeniable fact. And if the economists can’t explain how we got to where we are today predicting where we’ll be in another 30 or 40 years might be a tad difficult for them.
eugene on Sat, 23rd Nov 2013 1:52 pm
Personally, I’m wondering when we’ll manage to hit peak BS. I am doubtful it will ever be reached as the amounts available seem to be infinite as there appears to be an infinite number of mindless individuals who will spout endless amounts of BS.
Written by an individual with a degree of some sort who is capable of infinite amounts of BS which, of course, makes me an “expert BSer”.
Beery on Sat, 23rd Nov 2013 2:40 pm
Eugene, I think, in order for there to be a peak in BS, Daniel Yergin has to be involved. So we’re probably not there yet – at least not with this article. But it does come close.
Northwest Resident on Sat, 23rd Nov 2013 5:06 pm
Oil is like an addictive drug. The more expensive it gets, the more “the junkies” sacrifice other necessities in order to beg, borrow or steal their precious drug. If the price of the drug goes higher and higher, the junkies will just deprive themselves and those around them of more and more, same as with oil. There doesn’t seem to be a “rational” maximum price at which the world will stop consuming oil because the world is pathetically addicted to it. When it costs more to get oil out of the ground than can be earned selling it, I imagine “the junkies” will still be out there digging for it, selling their children and everything else of value to keep pulling that addictive drug out of the ground.
gordianus on Sat, 23rd Nov 2013 6:38 pm
I keep seeing this concept of ‘peak demand’ in articles in the business press, but I haven’t found it defined in economics.
As I understand it the theory of demand is that demand and supply are kept in balance through the mediation of price. So I don’t see how demand can be considered in isolation or its behaviour described without reference to price.
It seems obvious to me that if the price of oil was lower, there would be less incentive to produce machines that use non-oil fuels and hence demand for oil would go up. That’s the effect in practice of the economic theory of supply and demand.
Consequently I am inclined to think that peak demand is not a meaningful concept and that articles like this are nonsense. But I am keen to be corrected if I am wrong. Any economists care to comment? Have I missed something?
Keith_McClary on Sat, 23rd Nov 2013 10:19 pm
gordianus wrote:
“I keep seeing this concept of ‘peak demand’ in articles in the business press, but I haven’t found it defined in economics.
As I understand it the theory of demand is that demand and supply are kept in balance through the mediation of price. So I don’t see how demand can be considered in isolation or its behaviour described without reference to price.”
Right, this is what “peak oil” always said, we go through the easy oil first and then get into the expensive difficult oil, substitutes (syncrude, biofuels) and alternatives. It is the high prices that limit consumption.
I never took Economics 101, but I thought it included “supply = demand”.
beery:
I think Yergin was among the first to use “peak demand” (in that sense) in 2005.
Newfie on Sun, 24th Nov 2013 12:43 am
Um…. Peak demand = Peak Oil. Duh.