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The Arrival Of Peak Oil Demand And The Final Days For Oil

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Summary

There are greater threats to the outlook for oil than growing OPEC or U.S. shale oil production.

Peak demand growth for oil will arrive faster than commonly considered.

Renewable sources of energy and electric vehicles are advancing at a rapid rate aided by significant leaps in technology.

Known oil reserves are destined to become stranded assets.

Oil stocks are an increasingly unappealing long-term investment.

The latest gyrations in the price of crude and actions by OPEC and key non-OPEC oil producing nations continue to garner the attention of investors, market pundits and analysts alike. While the outlook for oil (USO) has once again shifted to one of optimism because of additional efforts by the Saudis to boost prices by reducing supplies, amid rising geopolitical tensions in Venezuela and larger-than-expected inventory draws, the long-term forecast is not as positive as pundits believe.

The energy sector is undergoing a seismic transformation that sees fossil fuels on the back foot and gradually targeted for elimination from the global energy mix as the secular trend to renewables gains considerable momentum. What the Saudis don’t realize is that their attempts to stymie the U.S shale oil boom and reaffirm OPEC’s dominance in global energy markets have only added considerable momentum to that profound shift.

The oil industry is facing an inevitable confluence of events that will cause peak demand to be realized well before the time when OPEC and other industry participants believe it will occur. Once reached, demand for crude will slip into a permanent decline spiraling ever downward, causing large portions of global oil reserves to become stranded assets and making oil stocks highly unappealing investments.

The fight against global warming is gaining momentum

Global warming and climate change are perceived to be among the greatest threats to humanity.

Already, extreme weather in the form of El Niño has wreaked havoc across the globe with it estimated to be responsible for causing up to 60 million people around the world to face the threat of severe hunger. The drought-like conditions and other extreme forms of weather that it has caused in many nations have not only impacted food supplies but also had a marked negative effect on hydrology, which ironically has underscored the vulnerability of hydroelectricity as a form of renewable power.

Lower water levels have reduced the flow through many hydro facilities in the Americas, notably South America, causing the amount of electricity produced to fall. This, along with other pollution-related phenomena including poor air quality in major cities, ocean acidification and acid rain, keeps driving the need to reduce pollution and improve air quality.

That saw the formulation, ratification and implementation of the Paris Agreement on climate change, which entered force in November 2016 and aims to keep the global temperature increase this century to below two degrees Celsius above pre-industrial levels. The eventual goal of the agreement is to eradicate fossil fuels from the global energy mix.

First to be targeted is thermal coal and for good reason. It has been identified as the single largest emitter of greenhouse gases globally and it is this that has seen the push to phase out coal-fired power plants. This has been a key driver behind the rise of natural gas as a less polluting intermediate fuel for power generation until renewable energy sources are more cost-effective and reliable, especially for base load power generation.

The end result is a significant decline in thermal coal prices and coal mining activity with it on the fast-track to becoming a stranded asset. There are signs that crude is now rapidly approaching a similar point at a rate of knots that is well in excess of that expected by OPEC and the oil industry.

Peak demand to arrive sooner than commonly thought

They believe that demand for petroleum will keep growing primarily because it is a key source of energy on which modern society has become highly reliant. Regardless of the secular trend to renewable sources of energy and weakening demand growth for crude, which is the cause of the current supply glut, OPEC and many oil majors believe that peak demand is decades away.

The head of Saudi Aramco (Private:ARMCO), Saudi Arabia’s state-owned energy company, stated in April:

It is why I believe “peak oil demand” is not in sight for at least the next few decades, and why the notion of “stranded resources” is not one I recognise.

The International Energy Agency believes that demand growth will continue up to 2040 and beyond while oil majors Exxon Mobil (XOM), Chevron (CVX) and BP (BP) share a similar view. This is because oil remains a crucial source of energy globally and that alternative renewable energy technology is not advanced enough to allow for a quick seamless transition.

Nevertheless, there are signs these views could in fact be the outliers.

Other energy majors such as Royal Dutch Shell (RDS.A)(RDS.B) believe that peak demand could occur by 2021, and Norway’s Statoil (STO) has predicted the mid-2020s. Then there is Carbon Tracker, a think tank of energy, financial and legal analysts, which believes that peak demand will occur in 2020, less than three years from now. After that point, according to Carbon Tracker, demand for oil will fall into terminal decline thereafter.

That means there is no need for the industry to keep growing, especially at the rate now being witnessed.

While a two-degree Celsius world as outlined in the Paris Agreement would lead to a third of known world oil reserves becoming stranded assets, in the scenario painted by Carbon Tracker the volume would be significantly greater.

Uptake of electric vehicles is proceeding at a rapid rate

The single factor that the naysayers of peak demand point to is the dependency of the modern economy on oil as a fuel, particularly for transportation. Gasoline and other fuels for motor vehicles, according to the U.S. EIA, are responsible for consuming 67% of all oil produced.

While demand for gasoline is declining in developed nations because of increased emission controls and the maturity of those markets, it is rising in China and India. That, according to Exxon, along with those countries’ ongoing modernization, growing wealth and expanding economies, will drive greater demand for motor vehicles and gasoline sustaining demand growth for some time to come.

Nevertheless, the evidence, notably the rise of the electric car, indicates that the thesis posited by Carbon Trackers could certainly eventuate.

Not only have the governments of France and Britain banned the sale of petrol and diesel cars by 2040 but China and India, which are expected to drive demand growth, are considering similar legislation.

New Delhi has said that only electric cars will be sold by 2030 while Beijing, which has yet to issue an all-out ban, is promoting the growth of electric vehicle sales. It is doing this through a range of methods including banning older fossil fuel vehicles from being used during air quality alerts in major cities and restricting the volume of new vehicles, except for EVs, that can be registered in major cities. China is also seeking to ensure that electric vehicles make up a fifth of all new car sales by 2025 and is expected to become the largest market for EVs that year.

Other European governments have either implemented or are considering similar legislation. Norway has banned the sale of fossil fueled vehicles by 2025 while Germany’s Bundesrat is considering legislation aimed at only allowing zero emission vehicles on the road by 2030.

While those targets appear ambitious for renewable energy, technology is moving at a rapid pace.

There is also ready considerable analysis which shows that many sources of renewable electricity are more cost-effective than fossil fuels such as coal, oil and natural gas.

More importantly, the technology for electric cars is advancing at a rapid rate, which is causing performance to improve and costs to fall. Tesla’s (NASDAQ:TSLA) Model 3, which started production in July, has a range of 215 miles, can accelerate from 0 to 60 mph in six seconds, has a top speed of 120 mph and a price tag starting at $35,000. These are quite credible performance metrics and comparable to gasoline-fueled vehicles.

Battery and charging technology, which is crucial to the future of the electric car, are progressing exponentially, making them cheaper and better performers.

It has been tipped by Bloomberg that electric cars would make up 54% of all new vehicle sales by 2040, causing global oil consumption to fall by eight million barrels daily, whereas Carbon Tracker believes that EVs will make up a third of all vehicles by 2035, half by 2040 and two-thirds by 2050, highlighting just how rapidly the demand for gasoline and hence crude will fall.

The end of oil as a valuable asset

It is estimated the rise of the electric car will lead to a 10% loss of market share for oil in less than a decade. While this may not appear to be that great, it was a 10% loss of power market share to renewable sources of electricity that caused the U.S. coal industry to collapse. That 10% market share represents around 2 million barrels daily and it was a surplus of this exact amount which triggered the prolonged slump in oil now being experienced.

Bloomberg has outlined an even more dire scenario where EVs will eliminate 13 million barrels of crude consumption daily by 2040 which would be sufficient to push prices even lower than at the height of the current oil slump.

The rise of renewable sources of power coupled with growing environmental pressures, pegging global temperature increase at 2 degrees Celsius or less, according to the IMF, will cause 35% of the world’s oil reserves to become stranded assets. Once peak demand is realized, an even greater portion of global oil reserves will become stranded assets and the pace at which that occurs will rise exponentially.

This confluence of events will all work together to keep oil prices low, making sub-$50 oil the new normal and wiping what on conservative estimates is up to $22 trillion of value off the global oil industry.

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7 Comments on "The Arrival Of Peak Oil Demand And The Final Days For Oil"

  1. Davy on Fri, 11th Aug 2017 6:32 am 

    These are exciting times and not the happy exciting times we knew in the 20th century. These are desperate times but hopeful times. Will electric vehicles and the coming renewable revolution really cause peak oil demand? What about the clear issues of new investment and new discoveries with our global oil budget. It is clear we are facing gaps immediately in just a few years. Oil demand growth is still rising albeit at a declining rate of growth. What about new technologies and their ability to plug this oil gap. I am pointing to nonconventionals and natural gas. What about the economic situation? Almost all versions of the MSM, the happy hopium fake green crowd, or the traditional oily crowd dismiss the economic situation and its potential for a huge disruption to everything. What would a NK war do to the global economy? We just don’t know those answers but it is likely the potential is for complete destruction to a hard recession.

    We are at the cusp of major changes. This is the transition times and these transitions appear like they could be very deadly. Techno optimist will talk grandly of technology and its promise and power. They tell us electric vehicles will smash the old FF paradigm. We have so many issues in motion at the same time it is fruitless to try to pinpoint any trends now as the overall and overriding trends. We could very well be heading into a very dark and dangerous time with economics and the geopolitical. No technical revolution can survive this. The technicals of this energy transition are still half baked. The cost ahead enormous at a time the global world is mired in dysfunctional debt.

    Our economic system is not up to the demands of all we are placing on it. We want to do everything at once and we are going to find we will have made many major investments that will not bring the returns advertised. Eventually a bad debt day of reckoning is coming. This is most notably coming in China who is the de facto credit driver of the global economy now. It has been primarily China that has maintained demand in this sick global world at the end of a Ponzi cycle of financial repression and easing. There are clear signs China has a Minsky Moment ahead with its credit policies. It is just unclear how the world will adapt to this budding Chinese financial crisis.

    Will the world continue to manage these financial crisis through Ponzi economics? Basically late term Ponzi economics is a demand declining world where wealth transfer occurs to maintain the façade of growth. Peter will be robbed to pay Paul. How long can that go on? How much productive effort can the world muster to support the so called renewable revolution in this kind of disruptive environment? We must remember the renewable revolution is itself a disruptive event. You can’t upset the oil industry, oil nations, and other supporting fossil fuel industries without consequences both apparent and unintended.

    This is another happy go lucky techno optimistic article hoping oil dies and global warming will be mitigated through techno means. There is so much more to this equation than the techno aspects. Human behavior and the environment will not follow techno narratives. The economics of all this is deeper than energy. It is systematic and representative of an age of limits being reached.

  2. Cloggie on Fri, 11th Aug 2017 6:41 am 

    Expect the breakthrough to come from small countries first, like Denmark did for wind and now Norway for the e-vehicle. You need whole-hearted government backing for this to succeed. The diesel ban in Stuttgart will be a great help as well.

    It are usually small events that trigger an avalanche.

    Nobody wants to be seen as “backwards” if he has the potential not to be backwards.

    Yuppiedom for instance began in the US shortly after 1980 but only a few years later had spread over the globe:

    https://en.wikipedia.org/wiki/Yuppie

    My own freelance IT-career would have been unthinkable without this book I bought in 1987:

    https://www.bibliotheek.nl/catalogus/titel.863788548.html

    I agree with this article. It will happen faster than most imagine and the higher the oil price, the better (but not too high and choke the economy off).

    $100,- would be fine.

  3. Antius on Fri, 11th Aug 2017 7:20 am 

    More nonsense. A lot of this idealistic thinking is going to hit a brick wall when the next financial crisis hits.

  4. dave thompson on Fri, 11th Aug 2017 7:56 am 

    “Peak demand growth” for oil is another way of saying we live on a finite planet and at some point the liquid fuels that fired our collective world economies for the past century or so are going away no matter what humans want.

  5. dave thompson on Fri, 11th Aug 2017 8:09 am 

    Cloggie the only breakthrough we can expect is that there is nothing that will replace FF’s and power to fuel industrial civ as we know it at scale.
    Yuppiedom and the IT industries were both brought about by the abundant use of FF’s. What is your point? That in Stuttgart no more diesel cars, trains or trucking and world wide a domino effect will then allow electric cars to magically run industrial civ?
    No I am not paying you $200 per hr to prove your ridiculous assumptions. You do not like me questioning you? Quit with the Utopian hopium.

  6. MASTERMIND on Fri, 11th Aug 2017 8:09 am 

    Technology is not the seventh Calvary poised to ride to the rescue.

  7. rockman on Fri, 11th Aug 2017 9:06 am 

    “The end result is a significant decline in thermal coal prices and coal mining activity with it on the fast-track to becoming a stranded asset.” I gather that this SA article is rather dated. They really should try to stay with current stats if they want to be relevant. From

    http://www.mining.com/thermal-coal-price-rally-hold/

    “After a surge in coal prices in the second half of 2016 on the back of mining curbs imposed by China, both thermal and metallurgical coal have declined sharply this year. But at above $80 and $150 a tonne respectively, the market is still trading well above recent multi-year lows which saw seaborne benchmark thermal coal trade dip below $50 and coking coal touch $75s.

    A new report from BMI Research, a unit of Fitch, predicts thermal coal prices will drift lower but hold onto much of these gains on the back of strong demand from top consumer China which forges as much steel and burns as much coal as the rest of the world combined. BMI upped its price expectations for this year and 2018 and now forecasts steam coal to hover between $70 to $90 over the next three to six months buoyed by Beijing’s continuing fiscal support to the heavy industries.”

    In reality current thermal coal prices are at or above the price from 1996 thru 2007.

    http://www.goldendragoncapital.com/wp-content/uploads/2016/05/Thermal-Coal-Price-History.png

    In fact 2X greater during a fair bit of that period. Yes: prices have decreased significantly in the last 10 years. Decreased from record highs that jumped from $50/ton to almost $200/ton for a short period. But current prices are still well above the historic average before the price surge that began 10 years ago.

    Just one more example of cherry picking data to support an otherwise unsupportable position.

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