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Is Peak Oil Past Its Peak?

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Does anyone care anymore which year will eventually hold the title for global oil demand's zenith? Or have things moved on, and will “peak oil” be a largely ignored afterthought? Supply and demand data even for the past, much less forecasts for the future, are dodgy at this point and subject to recurring large revisions. Even with prices and profits at exhilarating highs for the industry, capital spending is constrained and targeted at quick-return projects. Shareholders look set to get about as much in dividends and buybacks as they can be given without companies risking higher taxes and lawsuits. And shareholder pressure for more ambitious carbon-reduction targets intensifies regardless. With uncertainty everywhere and the Western oil industry behaving as if oil is already in decline, who cares whether demand is actually falling yet or will coast along around current levels for a few more years? Greenhouse gas emission counters probably, but not many others.    

As 2021 began, there was speculation that, what with the 2020 collapse in economic activity due to Covid-19, 2019 might have marked the forever peak of global oil demand. As 2022 began, most forecasters in and around the oil industry were convinced that particular bullet had been avoided, and demand would continue to grow for several more years.

Now, with threats to economic expansion looming from the direction of both Europe and China, not to mention an increasingly inflation-fixated US Federal Reserve Board, the International Energy Agency (IEA) has cut its forecast for average 2022 global oil consumption to 99.4 million barrels per day. That’s up from 2021 but below its 2019 top-demand-to-date figure of 99.7 million b/d. Other 2022 demand forecasts remain slightly higher but are coming down fast in the face of Russian supply disruption, Covid-19 shutdowns in China, and inflation everywhere.

Oil market analysts are in a race with economists to see who can bring down growth projections quicker. The International Monetary Fund (IMF) has chopped 1.3 percentage points off its 2022 global GDP growth forecast over the last six months, to 3.6% — and nobody would be surprised to see it cut further. It isn’t just — or mainly — the usual question of slow economic growth constraining energy demand, it’s the potential of disrupted energy supply constraining economic growth.

The German Bundesbank this week estimated that an abrupt cutoff in Russian gas flows to Europe would chop 5% off German GDP this year. That’s a bigger drop than the 4.6% hit the country took from Covid-19 disruptions in 2020. The repercussions would certainly reverberate through less Russian gas-dependent parts of Europe, and the world for that matter, given Germany’s heavy integration into global supply chains for manufactured goods, notably including autos.

EV Expectations and Realities

With inflation increasingly entrenched and no immediate prospect of an end to constraints on Russian oil and gas sales, any global slowdown or regional recessions could easily extend into 2023. If so, odds are oil demand will be flat or shrinking in 2023 as well as in 2022 — and perhaps beyond.

Meanwhile, EV sales continue to outpace projections. Expectations are that the number of plug-in electric vehicles (EVs) on the world’s roads will reach 20 million this summer and 26 million by the end of this year — around 2% of all estimated vehicles in use. That’s a small percentage, you might say, but so is recent historic growth in oil demand, while EV sales were up by over 100% last year and nearly 200% on 2019, according to data from EV-Volumes.

A major disruption due to shortages of microchips, lithium or who knows what could affect new EV availability and slow things down. Barring that, though, growth shows every sign of continuing at similar or even higher rates, with the US expected to join China and Europe in the EV boom camp as electric pickups and SUVs become readily available this year and next.

If so, the impact of EVs will soon be perceptible on gasoline use — if it isn't already. Growth in overall oil demand will become less likely with every passing year. Two years of stagnation or decline could well put oil past its forever peak.

What Matters Now

The new question is, does it matter? Through much of this century, equity markets have been fixated more on growth than profits, with the relatively low-earning, high-growth tech sector roaring ahead while oil and many other “old economy” shares languished, to the point that oil companies now barely figure in equity-value indexes they dominated little more than a decade ago.

That has turned on its head so far this year, Energy Intelligence has noted, with the S&P Oil Index up 15% for the year to mid-April, against an almost 8% decline in the broad S&P 500 Index.

Oil company shares are unlikely to retain such relatively high investor appeal for long. However, there could be some durable benefits for the industry. Companies have cleared much of the debt off their balance sheets, and they will win back some investor affection with the dividend hikes and share buybacks expected alongside earnings announcements over the next week or so. That should leave them in much better shape to face the downturn that will inevitably follow before too long.

Also, the stark demonstration that oil and gas prices won’t always be weak through the transition will bolster companies’ case with investors — even as it adds momentum to the transition to renewables and transport electrification.

A speedier transition means all this is good news for the oil and gas industry only if it is first accepted that fossil fuels have no long-term future, and that the critical challenge oil companies face is navigating the transition, either to some non-carbon-emitting future or to gracefully going out of business — an endgame strategy, if you will. But that seems to be widely accepted — another sign of the decreasing significance of naming an actual date for peak oil demand. The industry has mostly accepted that the fate of fossil fuels is sealed.

Strategic Considerations

Which of the various strategies being pursued by Western oil majors and others will prove “best,” whatever that means, remains an open question. Chevron and Exxon Mobil have the advantage of bigger positions in the US shale patch, the best spot for revving up output in response to short- to medium-term shortages and disruptions such as the world is now facing — and quickly reining it back in again when markets so dictate. That kind of flexibility can be highly profitable and a benefit to corporate reputations.

However, the US majors are running a very real risk in betting so heavily on unproven post-carbon technologies such as hydrogen and carbon capture from which they themselves don’t expect to see large investment potential, much less significant financial payback, before 2030. If the shift to renewable electricity and EVs progresses as rapidly as many now hope and expect -– including top EU and European national government leaders –- the European majors’ bet on solar, offshore wind, and other technologies of the here and now may look a lot more prescient.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

Topics:
Oil Demand, Oil Forecasts, Oil Prices, Gasoline, Electric Vehicles
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