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Page added on September 26, 2017

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What The Peak Oil Demand Group Is Missing

Consumption

Summary

Demand for oil has increased every single year since the 2008 recession.

In spite of EV sales, the global non-EV fleet keeps increasing.

Rapid, or even rabid, growth will take a long time to stop the ICE fleet from expanding.

The market makes the news. Negative price action begets negative stories, and vice-versa. The media is hooked on causality and will go to great lengths to establish a link. The last 6 months have seen oil prices remain steady in spite of OPEC cuts leading to the “Peak Oil Demand” stories. The argument there can be summed up in 3 main points.

  • Renewable energy push will decrease demand for oil.
  • Banning of internal combustion energy (ICE) vehicles will decrease demand for oil.
  • Global oil consumption has likely peaked, and coupled with increasing shale oil supply, will keep prices depressed forever.

In all likelihood, oil prices will be significantly higher down the road, and we predict 24-36 months at most till “peak oil” stories make their appearance.

Let’s look at the data.

1) The crystal clear chart

Looking at oil consumption statistics to date, there is absolutely no evidence that demand is reversing.

Source: EIA

What is notable about the chart is that oil prices were quite high by recent standards between 2006-2008 and again between 2010-2014, and did little to actually slow down consumption.

2) The drop in the bucket known as EV sales

Global EV sales are on track to have a banner year. Current trends show that this may be the first year that sales cross 1 million vehicles annually. What does that look like in terms of global vehicle sales?

While that is one scintillating trend, it does not appear remotely ominous.

3) The global ICE fleet is going to keep getting bigger

EV sales in 2017 will increase about 30% from 2016 levels. While that is good growth number, it is less than the percentage increases in both 2015 and 2016. To model the size of the global ICE fleet, we made the following assumptions.

  • Total EV sales increase 30% annually every year till 2030, which itself took a huge dose of optimism.
  • Total vehicle sales increase 3% annually every year till 2030.
  • 60% of total vehicle sales are replacement vehicles, and the rest are new vehicles added to the global fleet. This is about in line with what gets us to the 2 billion global fleet total by 2030.
  • Total ICE vehicles added to the global fleet is calculated as (60% of Total Vehicle sales) – (Total EV sales).

At a 30% growth rate in EV sales, the number of new vehicles being added to the global fleet first starts decreasing in 2026.

Take a second to assimilate this. This is not the point at which the global ICE fleet starts decreasing. It is the point at which the rate at which we add to the global ICE fleet will decrease. It will be all the way ahead in 2035 when we start reducing the actual ICE fleet from a point much higher than today’s numbers. Of course, that assumes continued 30% compounding, which would be a bit silly. But this extrapolation goes to show how much time the world has even in the absolutely best case. Even with pedal to the metal growth, we are likely to hit constraints in the form of lithium and cobalt availability no later than 2025.

4) Do we want to bail out Detroit again?

Unless Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA), two companies that take special pride in being run as not-for-profits, take over the entire auto industry, even 30% growth rates are likely to be a very painful pill to swallow for automakers.

As automakers struggle to achieve the EV sales figures required by regulatory bodies, they stand to lose thousands per sale; GM will lose $9,000 per Bolt, while Fiat loses $14,000 for every 500e sold.

Sure, costs will come down gradually, but to go from a $9,000 loss to $5,000 in profits which GM makes on average on every car will take a long time. Don’t expect automakers to push this fast. Also in 2019, GM will hit its Federal subsidy cap, which should itself be a big slowdown force to contend with.

5) What about hybrids?

The US fleet fuel economy is improving, albeit very slowly. In a recent comprehensive set of tests done by Emissions Analytics, an independent U.K.-based company, the last 4 years have produced almost no gains.

The results of the tests cast a cloud over an era of purported progress in fuel economy. Four years of results in the U.S. show no actual improvement in overall fuel economy and no decrease in CO2 emissions, according to EA.

Vehicles with engines smaller than 2 liters have seen essentially no change in fuel economy; vehicles with engines 2 to 3 liters (the most common) have seen fuel economy decrease by around 8 percent, while vehicles with engines 3 liters or larger have seen an 8 percent increase in fuel economy.

This decrease among the most common vehicles is magnified in the U.S. because Americans are commuting longer distances without switching to smaller vehicles.

Hybrids also consume large amounts of lithium, and the more they steal from a tight market, the harder it will be for pure EVs to grow.

Conclusion

The global macro backdrop of fast economic growth, coupled with spending cuts across the board on oil & gas exploration, is setting up the stage for significantly higher prices down the line. The media is still driving looking in the rear-view mirror. We think there are some fantastic opportunities today in the oil & gas sector, like this one which we recently wrote about. In Part 2, we will explore why even the regular increased demand forecasts could be extremely conservative.

seeking alpha



18 Comments on "What The Peak Oil Demand Group Is Missing"

  1. Mick on Tue, 26th Sep 2017 3:51 pm 

    Seeking Alfa = Seeking dumbass investors

  2. rockman on Tue, 26th Sep 2017 4:22 pm 

    Finally a common sense FACT based analysis. Although using a 30% y-o-y increase in EV sales for the next 13 years damages credibility more then a tad IMHO.

  3. peakyeast on Tue, 26th Sep 2017 4:41 pm 

    Is that crystal clear crude oil chart really normal crude oil and nothing else?

  4. Davy on Tue, 26th Sep 2017 5:20 pm 

    “The global macro backdrop of possible fast economic growth”
    and or economic decline. That economic decline could be severe and far reaching. The down side of the economic equation is never stressed. Why, because we are habituated to growth. We now have a Central Bank managed global economy that is allowing growth and at the same time extending and pretending the malinvestment that is bad debt that is not real growth. Recessions usually cleans economies. They also right bad attitudes. Recessions can’t happen anymore so what we have is pseudo recessionary conditions that are really just wealth transfer and parasitic consumption. We are now into a time of moral hazard of “whatever it takes”.

    How long can this go on? I don’t think anyone knows but I feel continued average growing growth has a shelf life and we are nearing it. Peak oil dynamics are alive and well and continue on every level. The equation will have variables like growth or decline affecting the demand side and either is possible. Alternative energy push and its effect on demand has the potential to be significant. On the other side is supply which will surely decline with a lack of serious and sustained investment. Then we also have the black swans of disasters, wars, and socio/political disruptions. We have a full plate. In my view we are on the cusp of anything. In fact it is a big world so decline and growth will have locus. What is clear is fundamentals are not sound, people are delusional, and the system is extended and nearing break points. IOW, we are in a surreal world and that can’t end well.

  5. Plantagenet on Tue, 26th Sep 2017 5:55 pm 

    When the demand for oil exceeds the supply, the price of oil will go up.

    When the price gets too high the demand will decrease. This will cause the price of oil to go back down.

    I know those are controversial ideas around here, but its pretty much common sense as well as being one of the fundamental concepts in the academic field of economics.

    Cheers!

  6. Go Speed Racer on Tue, 26th Sep 2017 8:40 pm 

    Ban Internal Combustion Engines?
    LOL.

  7. Anonymouse1 on Tue, 26th Sep 2017 9:45 pm 

    Might as well try to ban Tire and Sofa fires…

  8. GregT on Tue, 26th Sep 2017 10:27 pm 

    Planter,

    “I know those are controversial ideas around here, but its pretty much common sense as well as being one of the fundamental concepts in the academic field of economics.”

    So how do you explain The Oil Glut™ resulting in oil prices over twice as high as they have been during non-recessionary periods, going back for the better part of a century, in inflation adjusted dollars?

  9. Anonymouse1 on Tue, 26th Sep 2017 10:46 pm 

    Plante-tard drools about something called,

    “the academic field of economics.”

    Sounds like something only a retard could believe in.

  10. makati1 on Tue, 26th Sep 2017 11:45 pm 

    Or an economics professor who lives off of fools who believe that economics is a real science, and not just reading chicken guts and chanting mumbo jumbo. LOL

  11. GregT on Tue, 26th Sep 2017 11:46 pm 

    “Plante-tard drools about something called,
    “the academic field of economics.””

    Right up there with academic tarot card reading, or chicken bone tossing 101.

  12. Go Speed Racer on Wed, 27th Sep 2017 3:22 am 

    They did ban sofa and tire fires.
    But we still have ’em.

    Same with Internal Combustion Engine ban.

    If we burn all the old furniture in
    America,as waste-to-energy electricity
    generation, it solves the energy crisis.

    Would produce 1.21 Giga Watts
    of electricity.

  13. Cloggie on Wed, 27th Sep 2017 4:44 am 

    vehicles with engines 2 to 3 liters (the most common) have seen fuel economy decrease by around 8 percent

    This is a very US-centric story.

    Average mass car in Europe: 1390 kg
    Average cylinder volume Europe: 1.6 liter

    http://www.theicct.org/sites/default/files/publications/ICCT_EU-pocketbook_2015.pdf

    Average mass car in the US: 1,818 kg

    https://en.wikipedia.org/wiki/Car#Weight

    It is very well possible to reduce emission levels significantly if you make an explicit effort of reducing it:

    https://deepresource.wordpress.com/2017/07/24/europe-leading-the-way-in-reducing-greenhouse-gases/

    On a federal level nothing is to be expected from Washington, not even after Trump. Too busy playing empire, while the infrastructure is crumbling under their feet and the tent cities and army of food stamps collectors keep growing.

  14. Davy on Wed, 27th Sep 2017 5:53 am 

    “So how do you explain The Oil Glut™ resulting in oil prices over twice as high as they have been during non-recessionary periods, going back for the better part of a century, in inflation adjusted dollars?”

    Grehg, give your stupid oil is more expensive now doctrine a rest. It is not very relevant today with the adapted economy we live in. You constantly puke that shit. Try joining the 21st century. You need to reality test your comments more.

  15. Davy on Wed, 27th Sep 2017 5:57 am 

    “On a federal level nothing is to be expected from Washington, not even after Trump. Too busy playing empire, while the infrastructure is crumbling under their feet and the tent cities and army of food stamps collectors keep growing.”

    Clogster, we have a mix story here in the US depending on the region you go to then within the region the area. We are very much a class driven society influenced by economic opportunity. Yea, that is not fair but what it does is channel resources to the wealthy away from those areas who cannot produce as well. So you get more economic extremes. You would not understand that because your Europe is much more homogenous. Europe has plenty of decay and decline. It has its slums especially where your people of color live. Go whine somewhere else Eurotard.

  16. Davy on Wed, 27th Sep 2017 6:04 am 

    “Or an economics professor who lives off of fools who believe that economics is a real science, and not just reading chicken guts and chanting mumbo jumbo. LOL”

    Lol, says the college drop out. Makat could not make more than one semester of a structured environment like a University. He must have thought himself too smart to go to college. Yea, makt, you are a dumbass drop out so yes I can see where you don’t understand economics. I am a finance major I had to take a full load. Economics is relevant and important as a tool to understand the complex civilization we live in. The problem is when those who study economics take it into areas the study does not belong. There is plenty of science and math in economics. You don’t like it because it constantly shoots down your stupid agenda that has no basis in science and math. You are the fool that talks out his ass and only uses real science when it supports your narrative of the American Collapse doctrine.

  17. Xerxes on Wed, 27th Sep 2017 7:01 am 

    Rockman – The 30% y-o-y increase in EV sales likely won’t hold up, but I think he was just saying that the change in the past year was 30% so let’s make the assumption that that holds for the next 20 years. Even then, it’s not until 2026 that the rate of increase in ICE vehicles reaches a peak, which is a pretty remarkable conclusion. It was probably just an expediency on his part to avoid having to explain why 30% won’t hold up and prevents blowback from unicorn and pixie dust believers. Once you make some more realistic assumptions about the rate of penetration of EV sales then his numbers will get stretched out even more.

  18. Davy on Wed, 27th Sep 2017 7:40 am 

    “Once you make some more realistic assumptions about the rate of penetration of EV sales then his numbers will get stretched out even more.”

    Right, Rock, you are in the real world of pulling product out of the earth. You reality test or go broke. It is easy to arm chair speculate quite another thong to patiently see results.

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