Peak Oil is You

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Page added on August 27, 2013

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Housel: Peak oil is finally here


Peak oil is here, writes The Economist. But not the peak oil you’re thinking of, where supplies dwindle and prices march inevitably higher. That’s so 2008. This is peak oil demand, and it could hit in the next few years.

As The Economist wrote earlier this month:

“We believe that demand, not supply, could decline. In the rich world oil demand has already peaked: it has fallen since 2005. Even allowing for all those new drivers in Beijing and Delhi, two revolutions in technology will dampen the world’s thirst for the black stuff.

“The first revolution was led by a Texan who has just died. George Mitchell championed ‘fracking’ as a way to release huge supplies of ‘unconventional’ gas from shale beds … The other great change is in automotive technology. Rapid advances in engine and vehicle design also threaten oil’s dominance. Foremost is the efficiency of the internal-combustion engine itself. Petrol and diesel engines are becoming ever more frugal. The materials used to make cars are getting lighter and stronger. The growing popularity of electric and hybrid cars, as well as vehicles powered by natural gas or hydrogen fuel cells, will also have an effect on demand for oil.”

The last time domestic oil production was as high as it was in May (about 7.5 million barrels per day), current college seniors weren’t yet alive.

And demand, measured by oil supplied to U.S. markets, has fallen to near levels last seen when Bob Dole was running for president.

Rising production and falling demand is a dynamic few predicted even three years ago. But it’s today’s reality. And it can stop the end-of-the-world peak oil argument dead in its tracks.

These comments tend to bring up one question and one rebuttal.

The question is, why hasn’t this lowered gas prices?

There are two answers. One is that nationwide gas prices are lower today than they were five years ago, so the impact rising production may have on prices is a matter of perception. Second, and more important, oil trades on a global market, and rising American production has been offset by geopolitical factors like Iranian sanctions.

The common rebuttal to the peak-demand theory is to point to China.

A rising Chinese middle class means tens of millions more cars on China’s roads over the coming decade, which should push oil demand inevitably higher.

But oil demand from growth in Chinese autos is being dampened by the same force affecting America: rising fuel economy.

There were roughly 115 million cars on Chinese roads last year, and that figure should rise to above 200 million by the end of the decade. But the Chinese government recently imposed strict fuel economy standards that should bring average passenger cars’ fuel consumption from 8.2 liters per 100 kilometers in 2008 to 5 liters per 100 kilometers by 2020. The country hopes to have five million electric vehicles sold by the end of the decade. And forecasts of massive automobile growth assume China’s roads and air quality can handle such a surge. Perhaps they can’t. Four major Chinese cities already restrict vehicle sales. Eight more are expected to do so, according to the China Association of Automobile Manufacturers. Combine this with slowing population growth in Europe and Japan, and oil’s demand story can deflate quickly.

Two hundred years ago, Thomas Malthus predicted that population growth would outstrip food production, leading to inevitable misery and famine. “The power of population is so superior to the power in the Earth to produce subsistence for man, that premature death must in some shape or other visit the human race,” he wrote.

What he overlooked was humans’ ability to adapt through increased agricultural yield. The long-term energy story may be similar. Auto giants from General Motors to Toyota have doubled down on fuel efficiency. New jets from Boeing emphasize fuel efficiency. Buses, trucks and factories have all become more efficient, and in some cases are switching to new fuels entirely. Energy analyst Daniel Yergin points out that the United States uses less than half as much energy per unit of gross domestic product today as it did in the 1970s.

What looked inevitable a few years ago — falling production and rising demand — isn’t so clear any more. We are adapting. And like Malthus, predictions of inevitable gloom may end up looking severely overblown.

Housel writes The Motley Fool financial advisory column.

13 Comments on "Housel: Peak oil is finally here"

  1. Mike on Tue, 27th Aug 2013 11:14 am 

    Demand is falling because economies around the world are collapsing at an increasing rate. It’s just a big game of musical chairs at the moment to see who’ll be left with the last chair, but they won’t be the winner, the’ll have that chair whisked away from underneath them.

  2. Beery on Tue, 27th Aug 2013 11:23 am 

    It’s the ‘peak demand’ meme again.


  3. Mike999 on Tue, 27th Aug 2013 12:24 pm 

    80 Million more chinese cars will come online, which used zero gallons, but, that’s ok because now, when the come online they’ll get 25 mpg vs. 24 mpg. Totally solving the problem.

    Great Minds.

  4. deedl on Tue, 27th Aug 2013 12:35 pm 

    Peak demand is such a nonsense. Anyone with basic knowledge about economics should know better.

    Supply and demand are not single values, but functions between price and quantitiy.

    Peak Oil means that the supply curve will move to the left, creating a new market equilibrium. So the different supply situation in combination with very same old demand curve will result in higher prices and lower quantities. So people comsume less wihtout demand (meaning the demand curve) changing.

    The nonsense in the peak-demand-argument is the inversion of causality. While in realitiy the amount consumed shrinks because of shrinking supplies, the peak-demandist turn the lower consumption from a result towards a cause. Its niot demand shrinking, its the supply curve moving left.

    It is even possible that a shrinking supply offsets the marketequilibium more than a simulteanously rising demandcurve. Meaning the supplycurve moves quicker to the left then the demand curve moves to the right. So a reduced consumed volume in a world of rising prices (thats where we are) can even mean that the demand curve could be slightly rising, while the amount consumed is shrinking.

    Anyone who does not think supply and demand in terms of functions is simply either not qualified or willing to do a meaningful economic assessment of the situation.

  5. ohanian on Tue, 27th Aug 2013 12:40 pm 

    Let’s put the cart in front of the horse. Then proclaim that the cart is pulling the horse. Next exclaimed that the reason the system is slowing down is because the cart is no longer pulling the horse forward as fast as before.

    What? Skeptics are saying that the horse is pushing the cart? Rubbish. Complete and absolute rubbish. The cart is pulling the horse. But the cart is running out of energy and is no longer pulling the horse as hard. However the horse is still FULL OF ENERGY and the horse WILL ALWAYS BE FULL OF ENERGY.

  6. shortonoil on Tue, 27th Aug 2013 3:23 pm 

    “Supply and demand are not single values, but functions between price and quantitiy.”

    What is missing in this statement is a variable; it is quality. In 1930 the average gallon of conventional crude had the capacity to supply 138,000 BTU to the end consumer, by 2012 that number had fallen to 70,000. This decline resulted from a Second Law mandate known as entropy production. As long as one resides in the present universe entropy will continue to increase, and that increase will continue to destroy the utility of petroleum. The quality control engineer refers to this as determining an item’s “fitness for use”. Demand is also a function of the “fitness for use” of petroleum, which is declining.

    By the end of 2005 conventional crude production ceased to increase. Prior to that date, increasing production had compensated for its per unit decline in “fitness for use” (the increasing entropy). Now we are facing declining “fitness for use”, and declining quantity. As the amount of oil that is fit for use declines, the general economy slows, and competition for the remaining useable supply increases its price. Quantity is not a factor in petroleum pricing, there is 4,300 Gb of it on the planet. The quantity that is “fit for use” is the key.

  7. BillT on Tue, 27th Aug 2013 3:25 pm 

    I’ll believe this when I read about thousands of oil tankers sitting in ports waiting for a buyer for their cargo. Hasn’t happened yet.

    BTW: There are about 6,000 oil tankers in the world’s oceans today, holding an average of 1,000,000 barrels each or a total of about 6 billion barrels of oil at sea at any given moment.

  8. Pops on Tue, 27th Aug 2013 3:57 pm 

    The real average price of oil has been higher, longer than at any time since oil.

    The part missed by the “economist” is that not only will demand always equals supply but also that demand itself is made up of Desire+Ability.

    Demand is falling not because “Desire” is falling (the subtext of the Peak Demanders) but that “Ability To Pay” is falling.

  9. Stephen Lawrence on Tue, 27th Aug 2013 5:28 pm 

    “half as much energy per unit of gross domestic product” – what is a unit of GDP? A loaf of bread, for instance? Can others enlighten me/us?

  10. actioncjackson on Tue, 27th Aug 2013 6:51 pm 

    Yes, it’s a back and force balancing act between supply an demand that will result in the lack of use of oil entirely. I must say though that the perception of the limits on supply was the trigger.

  11. Pops on Tue, 27th Aug 2013 7:06 pm 

    GDP is just spending, it measures every dollar borrowed and spent. Every dollar spent on things and on non-things as well: rebuilding NOLA & NYC after the storms for example are additions to GDP – turn around and throw your mouse through the window, add the cost of replacing your window to the GDP. After you throw your mouse through the window go ahead and have someone tear the whole thing down – more GDP, rebuild it – more GDP… repeat? More GDP.

    Insurance company profits, real estate commissions, hedge fund profits and every dollar borrowed from the money fairy and then spent on something is part of the GDP. Every dollar borrowed by the government is part of GDP, yeah it’s made up money but so what?

  12. on Tue, 27th Aug 2013 7:06 pm 

    “Peak Demand” is Pollyana-speak for “demand destruction”. We’re on the bumpy plateau where the ups and downs of the economy only serve to suck remaining wealth out of the global system before the final decline.

  13. GregT on Thu, 29th Aug 2013 4:14 am 

    Anyone with a basic dose of common sense, should be able to understand that the ‘economists’ are about to meet head on with the realities of the mathematicians and the physicists.

    Unfortunately, common sense, isn’t very common.

    The economists, are about to recieve a very serious dose of reality.

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