Addressing peak oil demand through new technology

The term ‘peak oil’ used to describe that point in time when oil production would hit its zenith before beginning to fall, eventually to zero. The notion was first described by Shell geologist Marion King Hubbert in the 1950s, and his ideas gained increasing attention in the popular press in the 1970s, when OPEC began flexing its market muscle and the US was left wanting for oil due to the cartel’s embargo.

As his theory was picked up by energy analysts and experts over the subsequent years, forecasts of the oil-based energy industry’s inevitable apogee and decline continued to be advanced, and then disproved as new reserves were discovered, enabling global production to continue its steady growth in response to market demand.

Rise and fall

One of Hubbert’s early predictions was that the US would hit peak oil sometime between 1965 and 1970, and this proved partially correct. US oil output hit a historic high of 9.6 million barrels per day (bpd) in 1970, and fell somewhat into line with the Shell man’s projections in subsequent years, hitting a low of five million bpd in 2008.

However, around that same time, producers were beginning to take full advantage of new developments in drilling and completion technology – specifically long-reach horizontal drilling and massive hydraulic fracturing – opening up what had been previously uneconomic reserves. While US production hasn’t recovered the highs of 1970, production from shale formations has increased from that post peak low of five million bpd in 2008, to a high of 9.4 million bpd in 2015.

Viewed globally, total oil production also continues to rise, increasing from 31.8 million bpd in 1965 to 91.7 million bpd in 2015 (the last year for which figures are available).

This continuing and sustained growth has confounded many of the forecasts made in the 1980s and 90s that predicted the world would start running out of oil sometime between 2000 and 2020.

With new technology making difficult production environments more accessible and economically viable, most experts now believe that new reserves can be added to address any foreseeable increase in demand. So much so, in fact, that Hubbert’s theory has been flipped on its head, placing the focus on demand, and leaving experts to ponder when that might peak.

When will peak demand occur?

The International Energy Agency (IEA) reported in November 2016 that they believed peak demand would occur sometime after 2040, with most of the increased demand during the period coming from China and India. In BP’s ‘2017 Energy Outlook’, the company noted that a broad consensus of experts was predicting that peak would occur between 2025 and 2040, but also notes that there was considerable uncertainty surrounding that forecast.

This vagueness is primarily due to the sensitivity of demand to the price of oil, which, in turn, is largely part based on the volume of available, or excess, supply. Unfortunately, supply is also increasingly influenced by global and regional politics.

For example, oil producers reacted to rapidly increasing prices that followed the market crash of 2008 by increasing drilling activity and production. By July 2014, storage tanks were full and supertankers were languishing in ports with no market for their cargos.

The late realisation that the market was oversupplied caused prices to fall by about 70% between mid-2014 and mid-2015. Then, in 2016, with oil trading at around $30/bbl, an alliance of oil-exporting countries, including OPEC and non-OPEC members, agreed to reduce output by more than one million bpd. This reduction in supply helped to push prices back to something close to $50/bbl, a price at which many US producers could resume drilling.

Though daily US oil production declined by a 0.5 million barrels in 2016, production is expected to begin a gradual rise and could soon approach 2015 levels, perhaps higher, if prices hold.

Demand for oil is rapidly changing from patterns that existed when the primary concern was peak oil, not peak demand.

However, with new energy standards for everything from buildings to cars and trucks to appliances, and with the influx of subsidised renewable energy sources, demand for petroleum products in the US and Europe – particularly motor fuels – has subsided and demand is expected to begin a gradual and sustained decline, which implies that its peak may soon be reached in OECD countries.

Today, global demand for petroleum products is increasingly dependent on economic growth in the Asia-Pacific region, with the economies of China and India being the largest drivers of demand. Should these economies grow beyond current forecasts, demand for oil could exceed supplies, forcing prices higher until additional reserves come online. Should growth fall short, the world could again find itself with a surfeit of oil and prices might again fall back to $30/bbl.

The tenets of economics stipulate that supply and demand will always seek equilibrium; if supplies increase and demand is flat, prices will fall to a point that supplies will begin to dry up as more costly resources become uneconomic. However, if demand increases and prices rise due to scarcity, supplies will increase as more costly resources are exploited.

Expect uncertainty and volatility

Unfortunately, other, less predictable forces such as politics, regulations and regional conflict will always play a role in whether these resources will be made available. As the energy markets, and particularly the oil markets, continue to evolve – with new sources of production and emerging markets driving growth – oil prices will continue to be unpredictable.

The balance of supply and demand, exposed to politics, regulations and potential regional conflicts, can swing quickly and sharply.

As reflected in the failed forecasts of the past and the uncertainty in the current models, no one can predict with any degree of accuracy where the markets will go in the future.

All anyone exposed to the vagaries of these markets can hope for is that they have the best risk management systems and analytics tools, such as Eka’s ETRM software and Eka Analytics, to position themselves to maximise their upside when the markets move in their favour, and limit their downside when the markets move against them.