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Peak Oil Demand: When Is It Really Coming?

Consumption

Oil derricks at the Chevron Oil Field in Bakersfield, California on November 21, 2016. / AFP / Frederic J. BROWN (Photo credit FREDERIC J. BROWN/AFP/Getty Images)

There is a widely held belief that the peak of oil consumption will result from demand reduction rather than depletion. Published scenarios depicting how soon this might happen are all over the map, ranging from less than three years to beyond the foreseeable future.

Source: Modified from Bloomberg 2017

Source: Modified from Bloomberg 2017

Three broad categories of means to reduce consumption are illustrated by the shaded areas in the graph above. Efficiency includes improved fuel mileage and ways to reduce miles traveled, such as mass transit and ride sharing, as well as efficiency in buildings and other non-transportation uses. Electric vehicles include hydrogen fuel cell vehicles. Fuel switching includes biofuels and natural gas.

Published scenarios are influenced by philosophy, with forecasts of later peak demand usually coming from oil industry sources or traditionally related organizations and forecasts of an earlier peak from the renewable energy industry and environmental organizations.

In addition to continuing progress in vehicle fuel economy, renewable fuels and electric cars, the pace of future reductions will depend to a significant degree upon behavioral factors: the willingness to reduce driving, use alternative transportation and abandon fossil fuel cars for electrics. In the US, these changes have been slow in coming.

How oil consumption can be reduced: The US case

Let’s consider each of these measures, using the 2013 Union of Concerned Scientists (UCS) Half the Oil Plan as an example. This plan applies only to the United States, however, it illustrates potential reduction measures elsewhere.

Half the Oil Plan

Improved fuel mileage – Light vehicle fuel economy is the largest single component of the UCS plan, accounting for a four million barrel per day reduction by 2035, one third of the total. Fuel efficiency of commercial vehicles and airplanes adds another 1.5 million. This reduction depends in part on increasing U.S. Corporate Average Fuel Economy (CAFE) standards, currently scheduled to approximately double fuel economy by 2025. A recent announcement by President Trump suggests these standards may be lowered.

Reducing miles traveled – This category includes a variety of measures requiring behavioral changes. They fall into three categories:

  1. Substituting other means of transportation, such as walking, bicycling and mass transit
  2. Increasing vehicle occupancy by carpooling, vanpooling and ride sharing
  3. Reducing trip frequency or length by denser housing, trip chaining, decreasing discretionary driving, four day work schedules and similar methods

Changes such as carpooling require only a behavioral change. Mass transit and development patterns that reduce commute distance may require substantial investment and time to implement.

The UCS plan estimates a 1.5 million barrel per day reduction from these methods. The category includes “smart roads,” a catch-all term encompassing a number of technologies to increase travel efficiency.

Electric vehicles – In most analyses, oil savings by electric vehicles is a significant but relatively small component of oil demand reduction, primarily due to slow adoption. The UCS estimate is 1.5 million barrels per day, about 12% of the total. This is a substantially lower share than in the Bloomberg estimate, however, Bloomberg includes ride sharing.

Fuel switching – Biofuels, primarily ethanol in the U.S. and biodiesel in Europe, currently represent less than 5% of world transportation fuel. The environmental benefit of first generation biofuels is controversial, and biofuel crops compete with food crops, raising food prices. The UCS estimate of 1.5 million barrels per day is based on second generation biofuels, which do not compete with fuel crops. They have not proved commercial to date.

Smarter transportation – The UCS attributes 1.5 million barrels per day to smart transportation, which they do not describe in detail. Postulated reductions in this category commonly result from ride sharing services, such as Uber, and car sharing services, such as Zipcar. These services only reduce miles traveled if the users drive less than they would in an owned vehicle. The underlying assumption seems to be that the need for driving will be reduced by mass transit, mixed use development or other measures, requiring only infrequent driving. It is these changes rather than the sharing services that cause the reduction.

Self-driving vehicles are predicted by some to reduce oil consumption. The timing and effect of autonomous vehicles has its own wide range of predictions. There’s not agreement whether they would increase or decrease consumption.

Efficiency in non-transportation uses – Energy use in buildings is very important in carbon reduction, however, only about 5% of building energy worldwide is provided by oil. The UCS estimates improvements in building heating and industrial fuel use can save two million barrels per day.

Scenarios are dependent on many factors, not all of which are mentioned above. Many technological factors, such as improvements in fuel mileage and building energy use, can be predicted with reasonable certainty. Others, such as commercialization of second generation biofuels and hydrogen fuel cell vehicles, are difficult. Population and economic growth will have strong influence.

The importance of behavioral factors

Perhaps the most difficult set of factors to anticipate are behavioral. Americans are notoriously wedded to their automobiles and are resistant to mass transit and carpooling. Per capita mass transit and carpooling have been basically flat since the 1970s, while per capita vehicle miles traveled have gone up 80 percent.

It is an item of faith among many climate change believers that once individuals appreciate the “fact” of anthropogenic climate change, they will embrace the low carbon lifestyle. There are two problems with this viewpoint: Not everyone believes human activity is the primary cause of climate change and many who do believe are more driven by economics and convenience than climate concern.

Although climate concerns have been rising, the share of the U.S. population that considers it a serious threat is still a minority. Belief is strongly divided politically and geographically.

Source: Modified from Pew 2016

Source: Modified from Pew 2016

Source: Modified from Pew 2016

A series of Pew surveys shows Democrats are three times more likely to believe than Republicans. I find this divide mystifying, since climate change is a science issue rather than a political one. Regardless, about half of the U.S. population does not see it as a major problem.

Perhaps the more significant problem is that climate belief often does not translate into climate action. There are many reasons for this, but it has been well demonstrated that economics, convenience and personal freedom usually have higher priority. This casts doubt of the likely pace of reducing miles traveled and adopting alternate transportation.

Millennials are often cited as being more receptive to an eco-friendly lifestyle; in particular, they are more likely to use mass transit. This is true, although it appears to be because they are poorer and more debt-laden than previous generations. Their car ownership is increasing with the improving economy.

The bigger picture

The U.S. is not the world. Environmental awareness is higher in Europe, so somewhat faster demand reduction might be expected there. However, it is almost universally believed that most demand growth will be in China and India, with substantial contributions from other industrializing countries. There are also variations in estimates of this growth and its energy intensity, depending upon factors similar to those discussed above.

What’s really likely to happen

It should be clear from the discussion above that a definitive answer is not possible. The IEA says “no path of development of the global energy system can be confidently drawn to 2040.” Let us consider the base case to be the Nationally Determined Contributions (NDCs) under the Paris Agreement. Per the IEA’s assessment of those commitments, the New Policies scenario, oil demand grows through 2040.

Source: Modified from IEA 2016

Source: Modified from IEA 2016

Source: Modified from IEA 2016

Although the IEA scenarios are among the most widely cited, they are often criticized by environmental groups for being too fossil fuel and nuclear energy oriented. I share some of those criticisms, however, relatively minor weaknesses in the IEA and other mainstream forecasts are not as important as whether the NDCs and additional measures that might significantly reduce oil demand are likely to be implemented.

There is some question whether countries will reach their commitments. A 2016 report by Averchenkova and Bassi assesses the credibility of pledges. Two key countries, China and India, are assessed as having “potential for increasing support to credibility,” the lowest category. The United States ranks near the bottom of the middle category, “moderately supportive.” The recent decision by President Trump to withdraw from the Paris Agreement adds further question to the pace and extent of U.S. carbon reduction measures.

Of course, there is some possibility that individual countries or the parties collectively will exceed their goals. There is also private action by companies and individuals. Still, more strenuous action would be necessary to achieve peak oil demand.

A 2014 report by Carbon Tracker compared forecasts of oil demand from the IEA, Shell, BP, ExxonMobil and OPEC. All except the IEA 450 Scenario, equivalent to the two degree scenario, forecast increasing oil demand through 2035. Even some scenarios with relatively stringent CO2 limits in the Intergovernmental Panel on Climate Change Fifth Assessment do not have oil consumption peaking before 2040.

There are published predictions that petroleum fuels will be displaced more quickly. The Bloomberg article speculates it could be as early as 2020. Two of the three World Energy Council scenarios peak in 2030, however, these depend heavily on the development of second and third generation biofuels. It is fair to say that only scenarios with the most stringent CO2 reduction result in a decrease in oil demand before 2035.

Progress made to date and the stated intentions of governments show definitively that renewables will grow faster than fossil fuels and carbon intensity will decrease. Nonetheless, the best evidence suggests that oil consumption will not peak before 2035, and may peak substantially later.


Earl J. Ritchie is a retired energy executive and teaches a course on the oil and gas industry at the University of Houston. He has 35 years’ experience in the industry. He started as a geophysicist with Mobil Oil and subsequently worked in a variety of management and technical positions with several independent exploration and production companies. He retired as Vice President and General Manager of the offshore division of EOG Resources in 2007. Prior to his experience in the oil industry, he served at the US Air Force Special Weapons Center, providing geologic and geophysical support to nuclear research activities.

 

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.

Forbes



6 Comments on "Peak Oil Demand: When Is It Really Coming?"

  1. Newfie on Wed, 14th Jun 2017 7:14 pm 

    Peak oil demand = Peak delusion

  2. Go Speed Racer on Wed, 14th Jun 2017 8:21 pm 

    LOL there isn’t any peak oil demand.

    There is a peak oil supply.

  3. Davy on Wed, 14th Jun 2017 8:39 pm 

    Notice the first graph and how divergent from the status quo these projections are of the alternative scenarios. Second you may notice the implied growth rate of the economy in the extrapolation of growth. The amount of changes in this graph are so great as to call into question the bases for this reality.

    “There is a widely held belief that the peak of oil consumption will result from demand reduction rather than depletion.”
    This should not be a “rather than” view point. It should be inclusive with both effects. Peak oil dynamics is at work in multiple ways. It is also true consumption is changing with the advent of alternative but consumption is also changing from declining rate of growth as in stagflation. Malinvestment and excessive debt are representations of systematic drag. We are slowing ever so slowly but this is enough to cause growth turbulence. Today techno optimist point to this as evidence of techno transformation. Consumption is falling because of a techno transformation not a decline in the rate of growth from reduced activity. It is the type of thing that is too good to be true. I am not saying it is not happening what I am saying is it is not the whole story. I am also saying the story could change drastically.

    There are two things always a given today in main stream projections like the above on consumption. The economy will manage average growth and technology will improve efficiency and substitute for scarcity. This is optimistic forecasting based on optimistic criteria. People rarely see a problem with this. People want to see growth and optimism so this is what they see. We tend to see what we want to see and society is no different. Society itself has optimism and growth as its foundation. The entire narrative from politics to science is techno optimism with a growing economy. Imagine how very different the above data would change with stalling growth. It really becomes odd if actual decline become the dominant force.

    I would call this standard status quo economic view as extremist but to do that one would have to use a mirror. What is considered extreme is in fact reasonable and what is considered normal and reasonable is in fact extreme. This points to a society delusional and detached in paradoxes and traps.

  4. Davy on Wed, 14th Jun 2017 8:49 pm 

    “A New Chinese Threat Emerges: Net Bond Issuance Crashes Most On Record”
    http://tinyurl.com/ybz8do5g

    As for the final nail in China’s economy, it may have been the result of Yellen’s own rate hike earlier today: Chen Qi, chief strategist at private fund management company Shanghai Silver Leaf Investment Co., told Bloomberg said the surging borrowing costs will make matters even worse for struggling companies. Recall that in March, after the last Fed rate increase, China had no choice but to match it. Will it risk doing so again, knowing that the outcome could be a wave of corporate bankruptcies as Chinese corporations finds themselves starved of liquidity and locked out of the bond market?

    Finally, the reason why all of the above matters for not only the Chinese, but global, economy is because as we showed two days ago, China’s credit impulse is already crashing and has suffered its biggest drop since the financial crisis. As UBS calculated, “from peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis (-6% of global GDP), even if the dispersion of the decline is much narrower.” If one adds tens, if not hundreds of billions in Chinese corporate bond defaults to the China, and thus global credit drain next, the global credit impulse, and global deflationary tsunami, may surpass that observed during the financial crisis.

  5. Apneaman on Thu, 15th Jun 2017 12:12 am 

    The Oil Rig Graveyard of Cromarty Firth

    “In a remote sheltered harbor guarded by two precipitous headlands, in the North of Scotland, dozens of oil rigs are sitting idle, some for more than a decade, quietly waiting for offshore oil drilling to become profitable again.”

    http://www.amusingplanet.com/2017/01/the-oil-rig-graveyard-of-cromarty-firth.html

  6. Rockman on Thu, 15th Jun 2017 10:14 am 

    Earl does a fairly decent job of cruising down the middle of this road IMHO. Which pretty much his nature as I recall: he and I went to the same school a lifetime ago.

    Again it seems obvious those predicting a near term PD are doing so based upon wishful thinking for environmental reasons and are ignoring trends and common sense IMHO.

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