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Whatever happened to peak oil?

The oil market is caught between the need for higher prices to sustain the producers, and lower prices brought about by a current surplus of output.

by
John Redwood

in Features

22.11.2019

There have been many pundits telling us that the world will run out of oil. Some thought we would see the peak of output as early as 1970. Some forecast 2000. Today we are at a new peak level of output, with many oil experts anticipating further rises in production in the decade ahead.

Meanwhile, many countries are now following policies designed to curb oil use in the next decades. There are strong statements of intent to wean motorists off petrol and diesel, to substitute renewables for fossil fuels in power generation, and to transform the way we heat our homes and fuel industrial processes. Some are now forecasting peak demand rather than peak supply as the likely cause of the oil market tipping from growth to decline.

So why were so many forecasts wrong? They ignored the substantial growth in world population we have seen, with the number of people needing transport and heating doubling from 1970 to today. They ignored the rapid rise in living standards in highly-populated countries led by China and India. Rising living standards entail people using more fuel as they install central heating and acquire their first vehicle. They above all did not foresee the rate of discovery of new oil deposits that can be exploited.

Technological innovation

Part of the reason is improved technology for extracting oil, combined with higher average oil prices than the world was used to before the oil crisis of the early 1970s drove prices up sharply. Today the industry thinks it is realistic to think the world will be able to use oil extracted from oil sands despite the heavy nature of the deposit and to access the shale oils that also require special treatment. Recovery techniques from conventional oil deposits have also improved, allowing more optimistic views to be taken of available reserves. Many policy makers and campaigners are opposed to such developments and are seeking to find ways to cut demand.

Forecasters of peak oil now see it pushed out to 2030 or 2040. Forecasts often assume the world will get used to extracting and using more than 100 million barrels of oil a day as a matter of course, whilst discounting the idea that new policies will succeed quickly in cutting demand. In the last few years, the US has moved to producing more than 13 million barrels a day, proving that contrary to forecast it had not reached peak oil. In 1970 it was producing 10 million barrels a day. That dropped as low as 4 million daily barrels in 2005 and again in 2008. Guyana has discovered substantial reserves and will become an important producer. Venezuela may one day be under better management and has scope to increase its output substantially given the huge reserves it enjoys. It is difficult to see a supply constraint leading to a fall in oil output in the next few years.

Demand is more interesting

If the green policies are to succeed there does need to be a rapid move away from oil and gas to renewables and electricity. These policies are likely to most bite in the advanced world where per capita consumption of oil and gas is relatively high. Meanwhile, as the emerging economies develop they are likely to see a per capita increase in demand for oil and gas as people enjoy improvements in their living standards, acquiring more vehicles, better heating and more products made with fossil fuel using processes. China has increased its need for oil substantially in recent years whilst also trying to implement its own electric car and renewable revolution. It is not looking likely that we will see an early reduction in overall global oil and gas demand short of the world economy moving into a recession.

When OPEC meets on 5 December it will need to discuss production cuts again. The world oil market remains well-supplied thanks to the extra output coming from the US and other non-OPEC sources. OPEC has imposed some production cuts on itself and will probably renew those. Russia has agreed to co-operate with OPEC and will meet as part of the OPEC plus group at the time of the OPEC meeting. OPEC is caught in a bind. It needs to keep the price of oil up to meet the needs of state spending in countries very dependent on oil revenues. The more it succeeds in keeping the price up, the more incentive there is to non-OPEC members to invest in providing more energy from their more expensive sources of supply. The IEA thinks there could be more than 2 million b/d added to output from non-OPEC sources next year, likely to be more than the increase in world demand.

The oil market is caught between the need for higher prices to sustain the producers, and lower prices brought about by a current surplus of output. In the years ahead we may begin to see some diminution in demand. It will take time for there to be a meaningful shift to electric cars away from petrol and diesel vehicles worldwide, and time to convert people and factories onto electric heating. In a transitional period, demand should decline in the advanced countries as the shift occurs, whilst still rising in some emerging economies. The big oil companies will be on their own missions to build up their alternative energy portfolios, but in transition, they will still have substantial businesses satisfying demands for their fossil fuels.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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