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Page added on May 18, 2018

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How To Mitigate The Risk Of Peak Oil Demand

Production

There is a lively debate in the world of oil & gas surrounding the concept of peak demand. In essence, this debate centers around the question of when oil & gas demand will reach its peak and begin to decline.

This debate has become especially heated due to three recent catalyst. Firstly, the adoptions of electric vehicles (EVs) and their potential to disrupt oil’s number one pillar of demand: gasoline. Secondly, the continued growth of renewables, which have the potential to disrupt the largest natural gas market: electricity generation. Finally, the general public’s increasing awareness of, and concern about, greenhouse gas emissions and their impact on the climate.

The subject of peak demand has raised concern among shareholders of International Oil Companies (IOCs), and some are now even trying to force their companies to study the subject. The shareholders’ concern is explained by the fact that if peak demand occurs, the oil companies might be left with “stranded assets” – assets in which billions of shareholder dollars have been invested. As a result, most IOCs have communicated their views on the subject in quite explicit terms. In the U.S., ExxonMobil and Chevron don’t see Peak Demand arriving at least until 2040 or 2050. In Europe, BP is on record stating it could happen towards the end of the 2030s, while Shell communicated it could happen as early as 2025.

However, since the lion’s share of oil existing reserves are not held by the IOCs, but by OPEC’s members (and the NOC’s that produce these resources), it would seem logical that it is the NOCs that have to worry most about peak demand and stranded assets.

How would Peak Demand impact NOCs?

If/when peak demand hits, the global oil & gas markets will change fundamentally. Not because oil and gas demand would disappear overnight – that is not a realistic assumption considering the multitude of uses of the two commodities. But peak demand would result in another major supply glut, especially as shale technology is opening up new opportunities for production, putting downward pressure on oil prices.

In the “lower forever” environment that might result from this permanent glut, profit focused organizations would look to the lowest cost basins, most of which are located in OPEC’s major oil producing nations –Venezuela, Saudi Arabia, Iran, UAE, Kuwait, and Russia. Therefore, in what seems an ironic twist of fate, the countries that seem to have most to fear from peak demand will also most likely be the ones that remain standing if / once peak demand happens.

It is other nations with more complex geological or political realities such as Indonesia that will feel the immediate pain of peak demand. Interest in their production potential will disappear as drillers will find it too burdensome and thus too costly to explore, develop or produce at lower prices levels.

Of course, it is not that the countries that will be left standing by peak demand will not be impacted. The lower oil prices will severely affect the budgets of their governments. The ability of their NOCs to re-invest in new production would thus, most likely, be severely squeezed as their owners will put them under pressure to maximize royalty, tax and dividends payments.

What strategy options would the NOCs have for dealing with peak demand?

Is accelerated production an option? One might argue that the NOCs should start producing more now, well before peak demand, as their oil reserves are worth more now than they will be after peak demand hits. This additional money could then be invested in a ‘rainy day’ fund.

This is not a realistic option, however, and it could be argued that lowering the prices of oil and gas products would slow down the penetration of non-fossil energy and electric vehicles, and thus delay peak demand. Nonetheless, the impact of this strategy on the budgets of the major oil producing nations would be devastating. OPEC is currently supporting global oil prices, and bringing an additional 1.5 mmbd capacity back onto the market could push oil prices back down into the $50s, $40s, or even less. An accelerated production strategy would simply cause mayhem – a return to the 1st quarter of 2016 when OPEC’s “market share strategy” caused the price to fall into the $20s.

In other words, accelerated production is not a solution for the risk of peak demand. If anything, it would make matters worse for the major oil producing nations.

Is decelerated production an option? Decelerated production is producing below optimum, essentially what OPEC is doing right now. This tactic supports oil prices, which of course provides some comfort to the budgets of petro states. The argument for this strategy is that it makes funds available to the governments of the major producing countries, which they can then use to diversify their economies in preparation for peak demand.

But, at least part of the benefit of OPEC’s production cut is not going to the OPEC members. U.S. producers, who have not contributed to the production cuts stand to benefit from higher oil prices, enabling them to enhance their production. It is, therefore, an expensive strategy from a NOC’ perspective.

In fact, it is similar to taking drugs in order to achieve happiness. At first, it works well, but the effect quickly tapers off as higher prices encourage increased production elsewhere. So one needs another shot in the arm, bigger than the previous one, which after a while will induce the same response from other producers, and so on and so on.

Faced with peak demand, the decelerated production strategy is thus very risky in the medium to long term. Ceteris paribus, it’ll reduce the NOCs’ market share, while subsidizing other producers to invest in technology to lower their breakeven cost, and when peak demand arrives, it could hit the reserves of the major oil producing nations and make them less economically appealing. Next to this, it would incentivize investment in non-fossil energy solutions, accelerating peak oil demand.

Natural production, then? Thinking through the implications of accelerated and decelerated production makes it clear that the best strategy option is natural production, which optimizes long-term recovery from the field. Because as the above explains, in the face of peak demand, there is no quick fix solution that will keep oil prices around $70 per barrel and ensure continued demand.

In the past, NOCs could get away with sub-optimal efficiency because their resources were so prolific and so cheap to operate compared to the price at which oil was selling. The optimal strategy for NOCs now would be to focus on optimizing long-term recovery and lowering exploration, development and production costs. If they decide to do so, their reserves will remain the prime assets of the oil industry even after peak demand.

Indeed, in the short term this will not support the budgets of the major oil producing nations, but it needs to be understood that if peak demand will happen, there is nothing in the present that can offer a long-term solution other than reducing the budgetary dependency on oil revenues.

The best strategic hedge for the risk that peak demand represents is reducing dependence on oil revenues. This will require more than just state-run grandiose projects, as such projects will only deliver if they are accompanied by a liberalization of the wider economy, reducing red-tape, and enabling the population to follow their entrepreneurial spirit.

By Salman Ghouri for Oilprice.com



14 Comments on "How To Mitigate The Risk Of Peak Oil Demand"

  1. baha on Fri, 18th May 2018 8:24 am 

    And if you personally reduce your dependence on oil you will create peak demand. Then all these gyrations by the NOCs and not-NOCs will fade into the background noise.

  2. eugene on Fri, 18th May 2018 9:03 am 

    I see a world desperately wishing for some solution. There’s an old saying “a bird in hand is worth two in the bush”. Hoping for better storage, predicting “peak demand”, chattering about the impact of electric vehicles (which is very limited at the moment), bitching about denial and all the rest is hope of those living very comfortably. A neighbor made a comment a while back “if I can’t keep what I’ve got, life hasn’t been worth living” sums it up for me. Of course, I’m a “doomer” which may well be a realist. Or I could view the world through, what I perceive as, rose colored glasses. In the meantime, we’ll have endless guesstimates, hopes and dreams of maintaining the present.

  3. Antius on Fri, 18th May 2018 11:00 am 

    Discussions of peak oil demand are highly disingenuous. The decline in demand seen in OECD countries is due overwhelmingly to increasingly unequal wealth distribution.

    This is in part due to the supply shocks of 10 years ago. It has made OECD countries economically unstable and has saddled them with debt. Living standards have dropped for a great many people and so has the affordability of products and services made using oil.

    Discussions on peak demand make this sound like it is some kind of progress and that the world is in fact fine, that we don’t need to worry about peak supply any more. But demand destruction is directly caused by the unaffordability of supply at recent (past 15 year) prices.

  4. MASTERMIND on Fri, 18th May 2018 11:26 am 

    I want to see a peer reviewed study done on why this peak demand meme got started and why the media ran with it full throttle…I guess it was a hopeful story..

  5. Dredd on Fri, 18th May 2018 11:42 am 

    “How To Mitigate The Risk Of Peak Oil Demand”

    Find Planet 9 and call it “plan B” …

  6. LetStupidPeopleDie on Fri, 18th May 2018 12:53 pm 

    Human beings are so pathetic. We could have total collapse with people eating each other and the main street media and government keep telling us the every thing is fine an prosperity is just around the corner.

    One day I told on neighbor that peak oil was around the corner and humans need to change how we behave. She made an head sign tell me she does not want to hear anything negative anymore.

    5 year ago I told one of my uncle that peak oil was around the corner and price of gazoline will keep going up. He told me straight to my face that it is important but not important enough to keep talking about it.

    I no longer care about humain being and I wish all the denier a lot of suffering and pain and a long and painful death. They fully deserve it.

    I no longer care about the futur humans and I am watching them suffer with great joy.

  7. twocats on Fri, 18th May 2018 5:53 pm 

    These peak demand articles have been pretty pathetic – but with oil prices pushing $70/barrel this article is comedy gold. Even adjusting for inflation – the US has never seen oil prices this high outside of major events like the OPEC embargo and the onset of cheap oil peak in 2006.

    $70! Having risen 20% in a year when the S&P is flat! What do people think is happening right now? Certainly not peak demand. Of course, I have no idea what is happening, but I’m not posting boneheaded articles about it.

    I imagine if this trend-friend-train choo-choos its way up to $80/barrel and there isn’t a corresponding reaction from the supply side we could see financial markets seize up. I already feel the economy is very very weak and just begging for a reason to fall apart.

  8. MASTERMIND on Fri, 18th May 2018 7:15 pm 

    The Post-Growth Challenge Secular Stagnation, Inequality and the Limits to Growth (Jackson, T 2018)

    https://www.scribd.com/document/379596822/The-Post-Growth-Challenge-Secular-Stagnation-Inequality-and-the-Limits-to-Growth-Jackson-T-2018

  9. DMyers on Fri, 18th May 2018 9:15 pm 

    First, we need to ask, does the concept of peak oil extrapolate into any phenomenon with a quasi peak aspect? The word, peak, has become as fungible as grain in a silo.

    Peak does not describe demand. The peak concept applies to depletion. Peak is a physical phenomenon rather than an abstract overlay. Peak arises from extraction and destruction of the extract.

    Peak demand, as it is volleyed about, refers to an economic phenomenon, wherein price works to modify demand pursuant to a malleable perception of necessity. “I’ll just buy me a fockin’ electric car,” says the consumer. Whoa, demand just went down a notch.

    The extravagant and excessive demand for oil in the US may have moderated recently. I don’t see it, but maybe so. There may even be another country or region (e.g. Europe) where this has occurred. But the demand curve is ever upward, in reality, as the world emulates American excess. A car in every garage has multinational appeal. What Europe conserves, Asia burns.

    Peak demand should be amended to say the point of diminishing returns for increasing use of oil. It is a point where people find the price of oil and its utility to them, the users, dictates a decline in oil usage. Oil affordability rules this analysis. But affordability is not static or absolute. I might find oil unaffordable at price X, but if I give up beer and lottery tickets, it would become affordable. To wit, the demand for oil involves complicated analyses of one’s own life priorities and an ultimate decision on the weight of those priorities.

    Given that oil demand involves these abstract processes of valuation, it does not qualify as a concept equivalent to peak oil, which is a straight up observation of the behavior of depleting resources. Demand is what it is. It does not peak and then enter a terminal decline due to a finite human market. Demand is based on desire, and to that there is no end.

  10. dave thompson on Sat, 19th May 2018 3:19 am 

    The term “peak oil demand” sounds like it came strait out of a Washington think tank to divert attention away from the realities of depletion. The first time I heard of “peak demand” was on a real hot day, some decades ago and it refereed to electricity consumption during a 24 hr. period. So I would have to say it is not a stretch to figure that some group of econ 101 nitwits came up with the term as a real thing to muddy the waters of real world resource depletion.

  11. Go Speed Racer on Sat, 19th May 2018 6:17 am 

    I’m with dave. What dave said

  12. Cloggie on Sun, 20th May 2018 4:47 am 

    https://lightyear.one/

    100% solar car. Not even a need for external charging (well, most of the time). But evened out over the year, even in a country like Holland with average daily distance driven like 34 km, the car is an energy positive. The solar roof over the year produces more energy than it consumes (34 km/day).

    https://lightyear.one/i-want-one/

    https://cleantechnica.com/2018/04/21/lightyear-drops-its-one-top-to-show-how-it-was-designed-produced/

    The starting price is €119,000 ($147,000).

  13. MASTERMIND on Sun, 20th May 2018 7:36 am 

    Clogg

    With Iran sanctions Trump made Europeans look like the fools they are

    https://www.rt.com/op-ed/427116-eu-sanctions-iran-trump/

    HAHA! RT calling Europe fools! LOL so much for the great alliance you dream about you moronic idiot…

  14. Cloggie on Sun, 20th May 2018 7:39 am 

    http://www.spiegel.de/wirtschaft/soziales/venezuela-und-die-hyper-inflation-sozialismus-ohne-bargeld-a-1208626.html

    Inflation Venezuela 330,000%
    Money has vanished from life, other than dollar and gold.
    Everybody is hungry. People eat cats and dogs. Many Venezoelans have lost 10 kg (me too btw over the past 6 months, albeit on a threadmill).
    Metro is meanwhile free as it costs more to print tickets.
    Everybody is forced to pay electronically, because there is no paper money. But for that you need internet, that hardly works outside Caracas.

    The government hands out one box of food per month (sugar, spaghetti, flower, oil).

    Important cause for the current mess: nationalisation of 7000 companies under Chavez. These companies now produce 0-20% of what they used to produce. Lefties, you gotta love em.

    Oil production has sunk to a historic low of 1.5 mbd. Reason: underinvestment in infrastructure.

    Opposition wants to dollarize economy and eliminate inflation.

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