Is the era of peak oil finally here?

Crude oil is a finite resource that must be dis­covered, extrac­ted from the earth, trans­por­ted often over vast dis­tances to refiner­ies, con­ver­ted into vari­ous usable con­stitu­ent products and then shipped to dis­par­ate points of the com­pass to power much of the mod­ern world. Until rel­at­ively recently, the debate over “peak oil” centered on the date at which global sup­ply maxed out and then began a pre­cip­it­ous decline as depos­its ran dry.

Remark­ably, the atten­tion has now shif­ted from peak sup­ply to peak demand. A gen­eral con­sensus has emerged sug­gest­ing global demand for oil will reach a max­imum within a dec­ade or two and then begin fall­ing. The debate now cen­ters not on if but when peak demand arrives. By at least one oil com­pany’s reck­on­ing, it may already be upon us, but in any event, the era of declin­ing oil con­sump­tion is in sight, with major implic­a­tions for energy com­pan­ies and con­sumers alike.

Remark­ably, the atten­tion has now shif­ted from peak sup­ply to peak demand. A gen­eral con­sensus has emerged sug­gest­ing global demand for oil will reach a max­imum within a dec­ade or two and then begin fall­ing. The debate now cen­ters not on if but when peak demand arrives. By at least one oil com­pany’s reck­on­ing, it may already be upon us, but in any event, the era of declin­ing oil con­sump­tion is in sight, with major implic­a­tions for energy com­pan­ies and con­sumers alike.

From the 1859 dis­cov­ery of black gold in Pennsylvania until the early 1970s, U.S. oil pro­duc­tion fueled the Amer­ican indus­trial jug­ger­naut. Sub­sequent devel­op­ments in geo­logy and geo­pol­it­ics led to a nearly 50% decline in U.S. out­put and a dan­ger­ous depend­ence on impor­ted oil, espe­cially from the Middle East. As early as 1956, a geo­lo­gist named M. King Hub­bert warned of an immin­ent peak and decline in crude pro­duc­tion begin­ning around 1970 in the U.S. and 2000 glob­ally. “Hub­bert’s Peak” proved to be pres­ci­ent as U.S. pro­duc­tion plummeted while Arab embar­goes and energy crises dom­in­ated the next two dec­ades.

From the 1859 dis­cov­ery of black gold in Pennsylvania until the early 1970s, U.S. oil pro­duc­tion fueled the Amer­ican indus­trial jug­ger­naut. Sub­sequent devel­op­ments in geo­logy and geo­pol­it­ics led to a nearly 50% decline in U.S. out­put and a dan­ger­ous depend­ence on impor­ted oil, espe­cially from the Middle East. As early as 1956, a geo­lo­gist named M. King Hub­bert warned of an immin­ent peak and decline in crude pro­duc­tion begin­ning around 1970 in the U.S. and 2000 glob­ally. “Hub­bert’s Peak” proved to be pres­ci­ent as U.S. pro­duc­tion plummeted while Arab embar­goes and energy crises dom­in­ated the next two dec­ades.

Pres­ci­ent, that is, until a most unex­pec­ted devel­op­ment: the shale revolu­tion. Begin­ning in 2008, low-cost, abund­ant sup­plies released by new tech­no­lo­gies like hydraulic frac­tur­ing in pre­vi­ously depleted fields triggered a sharp increase in domestic oil out­put that changed the game and allowed the U.S. to regain the title of world’s largest oil pro­du­cer. By 2020 we had become a net exporter of oil and pet­ro­leum liquids and attained a new all-time record for crude oil pro­duc­tion of 13.2 mil­lion bar­rels per day dur­ing the first week of Octo­ber. Sud­denly “peak oil” no longer meant the onset of con­tinu­ally shrink­ing sup­ply but the begin­ning of a steady fall in demand for pet­ro­leum.

Pres­ci­ent, that is, until a most unex­pec­ted devel­op­ment: the shale revolu­tion. Begin­ning in 2008, low-cost, abund­ant sup­plies released by new tech­no­lo­gies like hydraulic frac­tur­ing in pre­vi­ously depleted fields triggered a sharp increase in domestic oil out­put that changed the game and allowed the U.S. to regain the title of world’s largest oil pro­du­cer. By 2020 we had become a net exporter of oil and pet­ro­leum liquids and attained a new all-time record for crude oil pro­duc­tion of 13.2 mil­lion bar­rels per day dur­ing the first week of Octo­ber. Sud­denly “peak oil” no longer meant the onset of con­tinu­ally shrink­ing sup­ply but the begin­ning of a steady fall in demand for pet­ro­leum.

The Brit­ish energy giant BP believes we are at the demand peak now, while OPEC (unsur­pris­ingly) expects oil demand to increase until 2045.

While the length of the run­way for fossil fuels remains uncer­tain, the trans­ition is clearly under­way.

Two recent mega mer­gers in the oil patch bear wit­ness to the unfold­ing regime shift. Exxon Mobil’s acquis­i­tion of Pion­eer Nat­ural Resources and Chev­ron’s pur­chase of Hess Corp. are con­sol­id­a­tion plays inten­ded to but­tress proven, low-cost oil and gas sup­plies rather than mak­ing risky invest­ments in deep water explor­a­tion or in dis­tant and increas­ingly hos­tile envir­on­ments. Exxon gains access to the Per­mian Basin, the largest and most pro­duct­ive U.S. shale field, while Chev­ron adds rich shal­low water depos­its off the coast of South Amer­ica and shale in the Bakken form­a­tion of North Dakota. Shale wells are rel­at­ively quick and cost effect­ive to drill and can eas­ily be scaled back or shut down dur­ing peri­ods of excess sup­ply, adding much needed flex­ib­il­ity to cope with short-term mar­ket volat­il­ity. These trans­ac­tions provide evid­ence that the major oil com­pan­ies expect fossil fuel demand to con­tinue, but not indef­in­itely and prob­ably not for too much longer.

Two recent mega mer­gers in the oil patch bear wit­ness to the unfold­ing regime shift. Exxon Mobil’s acquis­i­tion of Pion­eer Nat­ural Resources and Chev­ron’s pur­chase of Hess Corp. are con­sol­id­a­tion plays inten­ded to but­tress proven, low-cost oil and gas sup­plies rather than mak­ing risky invest­ments in deep water explor­a­tion or in dis­tant and increas­ingly hos­tile envir­on­ments. Exxon gains access to the Per­mian Basin, the largest and most pro­duct­ive U.S. shale field, while Chev­ron adds rich shal­low water depos­its off the coast of South Amer­ica and shale in the Bakken form­a­tion of North Dakota. Shale wells are rel­at­ively quick and cost effect­ive to drill and can eas­ily be scaled back or shut down dur­ing peri­ods of excess sup­ply, adding much needed flex­ib­il­ity to cope with short-term mar­ket volat­il­ity. These trans­ac­tions provide evid­ence that the major oil com­pan­ies expect fossil fuel demand to con­tinue, but not indef­in­itely and prob­ably not for too much longer.

The world eco­nomy is already much less reli­ant on pet­ro­leum products than it was 35 years ago. One import­ant meas­ure of depend­ence is called oil intens­ity, the quant­ity of oil required to pro­duce $1,000 in real GDP adjus­ted for infla­tion. Accord­ing to Columbia Uni­versity, about one bar­rel of oil was required to pro­duce $1,000 of GDP in 1973. Today, that num­ber is less than 0.43 bar­rels, a 56% reduc­tion in intens­ity thanks to sub­sti­tu­tion of altern­at­ives like nat­ural gas and renew­ables, as well as major advances in the energy effi­ciency of appli­ances and vehicles.

The world eco­nomy is already much less reli­ant on pet­ro­leum products than it was 35 years ago. One import­ant meas­ure of depend­ence is called oil intens­ity, the quant­ity of oil required to pro­duce $1,000 in real GDP adjus­ted for infla­tion. Accord­ing to Columbia Uni­versity, about one bar­rel of oil was required to pro­duce $1,000 of GDP in 1973. Today, that num­ber is less than 0.43 bar­rels, a 56% reduc­tion in intens­ity thanks to sub­sti­tu­tion of altern­at­ives like nat­ural gas and renew­ables, as well as major advances in the energy effi­ciency of appli­ances and vehicles.

Trans­port­a­tion, which accounts for 57% of all global oil demand, is in the early innings of a trans­ition as well. Today, elec­tric vehicles make up nearly 10% of all pas­sen­ger car sales, roughly trip­ling over the past three years. EV growth has slowed recently in the U.S. but con­tin­ues to accel­er­ate in China, the world’s largest auto mar­ket. And the even­tual deploy­ment of vehicles powered by clean hydro­gen with essen­tially no net car­bon emis­sions is much closer to real­ity than pre­vi­ously believed. All these factors point to even­tual demand destruc­tion for fossil fuels.

Trans­port­a­tion, which accounts for 57% of all global oil demand, is in the early innings of a trans­ition as well. Today, elec­tric vehicles make up nearly 10% of all pas­sen­ger car sales, roughly trip­ling over the past three years. EV growth has slowed recently in the U.S. but con­tin­ues to accel­er­ate in China, the world’s largest auto mar­ket. And the even­tual deploy­ment of vehicles powered by clean hydro­gen with essen­tially no net car­bon emis­sions is much closer to real­ity than pre­vi­ously believed. All these factors point to even­tual demand destruc­tion for fossil fuels.

But when? This is a ques­tion whose answer requires a healthy dose of humil­ity, but con­sensus fore­casts are con­ver­ging on “sooner rather than later.” The Brit­ish energy giant BP believes we are at the demand peak now, while OPEC (unsur­pris­ingly) expects oil demand to increase until 2045 (Saudi Ara­bia depends on oil sales for 75% of its sov­er­eign rev­enue). Split­ting the dif­fer­ence, the Inter­na­tional Energy Agency issued a new report last month pre­dict­ing the peak in world oil demand around the year 2030, a mere seven years away. The pace of the shift depends as well on the degree to which coun­tries fully adopt the Paris cli­mate accord reduc­tion tar­gets and could hap­pen sooner if more pro­gress is made.

But when? This is a ques­tion whose answer requires a healthy dose of humil­ity, but con­sensus fore­casts are con­ver­ging on “sooner rather than later.” The Brit­ish energy giant BP believes we are at the demand peak now, while OPEC (unsur­pris­ingly) expects oil demand to increase until 2045 (Saudi Ara­bia depends on oil sales for 75% of its sov­er­eign rev­enue). Split­ting the dif­fer­ence, the Inter­na­tional Energy Agency issued a new report last month pre­dict­ing the peak in world oil demand around the year 2030, a mere seven years away. The pace of the shift depends as well on the degree to which coun­tries fully adopt the Paris cli­mate accord reduc­tion tar­gets and could hap­pen sooner if more pro­gress is made.

Those of a cer­tain age may recall the very real and fright­en­ing risk to the U.S. eco­nomy from our heavy depend­ence on for­eign oil and the near axio­matic cer­tainty of its even­tual deple­tion. Today we pon­der the ulti­mate sub­or­din­a­tion of fossil fuels as the main source of energy power­ing the U.S. eco­nomic engine. Noth­ing short of amaz­ing.

 

 

Chattanooga Times Free Press