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Page added on December 28, 2020

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The Very Real Possibility Of Peak Oil Supply

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Three months ago, British oil giant BP Plc. (NYSE:BP) sent shockwaves through the oil and gas sector after it declared that Peak Oil demand was already behind us. In the company’s 2020 Energy Outlook, chief executive Bernard Looney pledged that BP would increase its renewables spending twentyfold to $5 billion a year by 2030 and ‘‘… not enter any new countries for oil and gas exploration.’’

That announcement came as a bit of a shocker given how aggressive BP has been in exploring new oil and gas frontiers.

The investing universe appears to concur with BP’s sentiments, with the oil and gas sector consistently emerging as the worst performer over the past decade. The sector suffered yet another blow after the largest investor-owned oil company in the world, ExxonMobil (NYSE:XOM), was kicked out of the Dow Jones Industrial Average in August, leaving Chevron (NYSE:CVX) as the sector’s sole representative in the index.

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Meanwhile, oil prices appear stuck in the mid-40s with little prospects of climbing to the mid-50s that most shale producers need to drill profitably.

Delving deeper into the global oil and gas outlook suggests that it’s peak oil supply, not peak oil demand, that’s likely to start dominating headlines as the quarters roll on.

Source: Bloomberg

Peak Oil Demand

When many analysts talk about Peak Oil, they are usually referring to that point in time when global oil demand will enter a phase of terminal and irreversible decline.

According to BP, this point has already come and gone, with oil demand slated to fall by at least 10% in the current decade and by as much as 50% over the next two. BP notes that historically, energy demand has risen steadily in tandem with global economic growth with few interruptions; however, the COVID-19 crisis and increased climate action might have permanently altered that playbook.

BP has modeled 3 possible scenarios for the future of global fuel and electricity demand: Business as Usual, Rapid Transition, and Net-Zero. Here’s the kicker: BP says that even under the most optimistic scenario where energy policy keeps evolving at pretty much the pace it is today (Business as Usual) oil demand will still suffer declines—only at a later date and a slower pace compared to the other two scenarios.

The oil bulls, however, can take comfort in the fact that under the Business-as-Usual scenario, BP sees oil demand remaining at 2018 levels of 97-98 million barrels per day till 2030 before falling to 94 million barrels per day in 2040 and eventually to 89 million barrels per day three decades from now. That’s a loss in demand of less than 1% per year through 2050.

However, things could look very different under the other two scenarios that entail aggressive government policies aimed at reaching net-zero status by 2050 as well as carbon prices and other interventions aimed at limiting global warming.

Under the Rapid Transition scenario (moderately aggressive), BP sees oil demand falling 10% by 2030 and nearly 15% under Net Zero (most aggressive).

In other words, the decline in oil demand is bound to be catastrophic for the industry over the next decade under any other scenario other than Business-as-Usual.

Luckily, this is the scenario that’s likely to dominate over the next decade.

David Blackmon, a Texas-based independent energy analyst/consultant,  has told Forbes that many analysts are skeptical about BP’s grim outlook. Indeed, Blackmon says a “Business as Usual” scenario appears the most likely path for the time being, given the time the global economy might take to recover from Covid-19 as well as the trillions of dollars that would be required to implement the other two cases.

Further, it’s important to note that BP made those projections before Covid-19 vaccines had entered the fray. With several viable vaccine candidates now on the scene, there’s a good chance that the global economy might recover at a faster-than-expected clip and thus help oil demand to recover more rapidly than earlier estimates.

Peak Oil Supply

Though rarely discussed seriously, Peak Oil Supply remains a distinct possibility over the next couple of years.

In the past, supply-side “peak oil” theory mostly turned out to be wrong mainly because its proponents invariably underestimated the enormity of yet-to-be-discovered resources. In more recent years, demand-side “peak oil” theory has always managed to overestimate the ability of renewable energy sources and electric vehicles to displace fossil fuels.

Then, of course, few could have foretold the explosive growth of U.S. shale that added 13 million barrels per day to global supply from 1-2 million b/d in the space of just a decade.

It’s ironic that the shale crisis is likely to be responsible for triggering Peak Oil Supply.

In an excellent op/ed, vice chairman of IHS Markit Dan Yergin observes that it’s almost inevitable that shale output will go in reverse and decline thanks to drastic cutbacks in investment and only later recover at a slow pace. Shale oil wells decline at an exceptionally fast clip and therefore require constant drilling to replenish the lost supply. Although the U.S. rig count appears to be stabilizing thanks to oil prices rebounding from low-30s to mid-40s, the latest tally of 320 remains far below the year-ago figure of 802.

Although OPEC+ nations currently have about 8 million barrels of oil per day of spare capacity, the current price levels do not support much drilling at all, and the extra oil might only be enough to cover the shortfall by U.S. shale.

By Alex Kimani for Oilprice.com



5 Comments on "The Very Real Possibility Of Peak Oil Supply"

  1. Outcast_Searcher on Mon, 28th Dec 2020 1:48 pm 

    Let’s pretend that re history and the law of supply and demand, the most likely scenario is that sustained higher prices (re need for more oil) won’t lead to higher production.

    Because, after all, writers have the same BS to sell they’ve been trying to sell re oil doom for the past 50 years.

    When 5 straight years of “undersupply” doesn’t cause more net production, THEN get back to us, because something may actually be going on.

    Meanwhile in the real world, the progress of green energy and efficiency and changes in driving habits (and less need to commute) will likely continue to mean peak demand has passed — meaning less “crisis”, even IF production tends to tail off.

  2. Fred on Mon, 28th Dec 2020 2:31 pm 

    “Luckily, this is the scenario that’s likely to dominate over the next decade.”

    How can we be “lucky” when there are still people who think we can continue to use the earth as a resource and waste dump and do this forever without consequences?

    There will be zero demand for oil in a wrecked world.

  3. The_Forbin_Project on Mon, 28th Dec 2020 2:41 pm 

    again we see the MSM cannot bear to say the word peak oil without taking on some BS about demand.

    Peak Oil is just a point in time when oil reached its max consumption. It does not care if its demand or supply. but I will take issue with “demand” being used as its a smoke screen for MSM to avoid admittance that oil peaks because of supply, that is , there is only so much the oil companies and NOC can supply at $40.00 BO for instance.

    still gotta laff

    Forbin

  4. Duncan Idaho on Mon, 28th Dec 2020 7:06 pm 

    How socialism made the COVID-19 vaccines possible

    https://www.salon.com/2020/12/28/how-socialism-made-the-covid-19-vaccines-possible_partner/

  5. FamousDrScanlon on Mon, 28th Dec 2020 7:59 pm 

    Outcast_Searcher in what ‘real world’ is there progress of ‘green energy’ and efficiency and changes in driving habits?

    Progress & efficiency are not metrics.

    Either you have data supporting these vague mean nothing claims or you don’t.

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