Peak oil demand
A THREAT TO OIL COMPANY VALUATIONS?
MIKE LYNCH, STRATEGIC ENERGY & ECONOMIC RESEARCH, MASS.
THE PAST couple of years have seen a shift from concerns that
oil supply would soon peak to a recognition of the potential
for oil demand to peak and decline, which would have a significant impact on the value of oil companies’ equities, comparing it to the sharp downdraft in US coal company stocks.
Unfortunately, there remain some serious questions and uncertainties that will be addressed here.
Discussion of the topic is not new. A decade ago, the Rocky
Mountain Institute and its doyen Amory Lovins released “ Winning the Oil Endgame,” which argued that a combination of
vastly improved automobile efficiency and cellulosic ethanol
would result in oil demand peaking (coining the term “
nega-barrels”). Later, high oil prices suggested that demand would
grow much slower in the future.
More recently, peak oil demand has become a popular topic,
with groups ranging from the environmental advocates Carbon
Tracker Initiative and analysts like Bloomberg New Energy
Finance foreseeing the potential for a peak in oil demand in
the near future—perhaps in a decade or less. The driving factors
cited vary include:
• The potential for battery technology advances, allowing
electric vehicles to make large inroads in vehicle markets;
• A breakthrough in biofuels technology;
• Autonomous on-call vehicles that might reduce vehicle
ownership and miles driven;
• Climate change policies that would require that large
amounts of fossil fuels be left in the ground.
Although they end up at peak oil demand, these threads all
have different assumptions, causes, and probabilities, but peak
oil demand will have different impacts on oil reserve values
depending on the types and locations. Oil sands tend to be
produced slowly, for instance, while conventional oil declines
Similarly, the impact of technological advances on petroleum
prices will depend on the nature of the advance. For example,
better batteries could make renewable energy more competitive
with natural gas turbines, especially by requiring less backup
power. Climate change policies might primarily affect coal
consumption, or even benefit natural gas producers, while
efforts to reduce energy poverty could see displacement of
noncommercial energy by petroleum.
BELIEF IN A PEAK
Many pundits have made a seamless transition from arguing
about peak oil supply to predicting peak oil demand by simply
admitting that the former was proved incorrect, especially by
the shale oil revolution. The reality is more complex. Shale oil
played a role in preventing supply from peaking, but only a
subsidiary one: from 1998, when “The End of Cheap Oil” ap-
peared in Scientific American, petroleum production has in-
creased by nearly 20 mb/d, of which only 4 mb/d was shale oil.
Indeed, peak oil theory was always pathological science.
The claim that any given country’s oil production followed a
Hubbert curve and could thus be reliably predicted is false:
most nations’ production does not resemble a Hubbert curve.
Similarly, the argument that production in a field, nation, or
region could be extrapolated to the endpoint once in decline
was also false: a peak in any given area can be followed by
increasing production, and sometimes a new peak.
Peak oil advocates’ supply modeling and resource estimates
were based on the mistaken presumption that geology deter-
mined production trends and changes in fiscal terms or political
access to resource basins were irrelevant. This is why so many
peak oil forecasts proved wrong, as predicted in Lynch (1995).
But why then did the idea have such strong appeal?
The basic concepts—oil is finite, depletion raises costs—
appeared sound enough that few examined the actual methods
used to produce the forecasts behind peak oil. It is noteworthy
that the idea had the greatest attraction amongst the environmental community, who trumpeted the basic argument without
examining the fundamental concepts.
REAL WORLD PEAKING
But whereas there has never been a global peak in production
due to scarcity for any non-renewable resource, a peak in de-