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Have We Already Reached Peak Oil?

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Has the world already reached peak oil demand? No one really knows, but while the question would have sounded absurd just six months ago, it is now so relevant that some experts believe the answer is yes. Of course, it is quite possible that global oil demand will quickly recover once the Covid-19 crisis is over, and grow for at least another decade. But the previous trend, at just around 1% growth per year, was already sluggish and slowing down with the ongoing energy transition, and very little is needed to reverse it (NE May2'19). In a recent paper on peak oil demand and long-run oil prices, BP's chief economist Spencer Dale indeed wrote that "small changes in assumptions about the myriad factors determining oil demand, such as GDP growth or the rate of improvement in vehicle efficiency, can generate very different paths." Behavioral changes caused by the virus crisis, like telecommuting for example, or accelerated policies against internal combustion engines to keep skies clear, would be good examples of such decline-triggering factors. Add slower-than-expected economic recovery -- L- or U-shaped instead of the desired V-shape -- and the world may find in retrospect that oil demand actually peaked in 2019 (NE Apr.2'20). "We should not be surprised to see this peak even as we are surrounded by fossil fuels in our daily lives," Carbon Tracker Initiative's (CTI) Kingsmill Bond wrote in a recent blog post, where he noted, too, that demand for horses peaked when cars made up just 3% of their number, and gas lighting demand peaked when electricity was still in its infancy (NE Sep.13'18). Assuming oil demand bounces back in 2021 by half the amount it fell in 2020 -- about 9% according to current estimates -- and then grows at half the speed it had before the crisis, or some 0.5% per year, it would take almost 10 years to get back where it was in 2019, Bond wrote. Banking giant JPMorgan Chase similarly found that, while its main scenario assumes demand will only take three years to get back to the 2019 level, a slightly different -- and not overly aggressive -- growth profile similar to the International Energy Agency's base-case scenario would extend that time to 10 years. This would leave plenty of time for the energy transition and behavioral changes to kill oil demand growth (NE Mar.19'20). Ratings agency Moody's, for example, has one scenario where oil demand in 2021 is 3 million barrels per day below 2019, and another equally likely one where demand is down 5 million b/d with longer Covid-19 constraints, a steeper-than-expected recession in 2020 and more profound behavioral changes. Under that scenario, "modest enduring changes due to behavioral change, combined with government policies and technological advances designed to reduce carbon emissions could make it unlikely that oil demand will return to its pre-Covid levels," Moody's believes. Similarly, the Boston Consulting Group (BCG) emphasized in a recent report that the global economy's energy intensity will continue to gradually decline, and that this could result in oil demand never getting back to where it was in 2019. Should a V-shape economic rebound materialize, worldwide fossil fuel demand could recover to 2019 levels as soon as 2022, the BCG found. But with insufficient economic growth to offset other forces, demand for fossil fuels will not move back to those levels until the second half of the decade, and "if the energy transition accelerates, this may never occur." Oil demand would suffer from slower growth in transport and travel, as well as from continuing efficiency improvements in the vehicle fleet. Cars, which before the crisis were already the weakest driver of growth for the next decade, could indeed become a major driver of decline if electrification accelerates. In the aviation sector, earlier-than-expected retirement of older and less-efficient planes during the Covid-19 crisis may also weigh heavily on oil demand (NE Jan.30'20). In his paper on peak oil, BP's Dale insists that focussing on the expected timing of the peak "attaches significance to this point as if once oil stops growing it is likely to trigger a sharp discontinuity in behavior," such as oil consumption starting to decline dramatically or investment in new oil production coming to an abrupt halt. This is, however, "very unlikely" because "even after oil demand has peaked, the world is likely to consume substantial quantities of oil for many years to come," Dale explains. But stagnating or slowly declining oil demand "will mean perennial overcapacity and low prices punctuated with periods of undersupply and high prices," CTI wrote in a 2018 report. Companies will face disruption at the peak, the report insists, which will cause "falling prices, rising competition, sector disruption and stranded assets." Indeed, the recent announcements by BP and Royal Dutch Shell they would write down up to, respectively, $17.5 billion and $22 billion in assets in the second quarter of this year arguably gives a preview of what massively stranding assets could mean in the future (NE Jun.4'20). Philippe Roos, Strasbourg

Topics:
Oil Demand, Carbon Capture (CCS), Low-Carbon Policy
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