Peak Oil Demand. Yes, but When?

Years ago, there was genuine concern about Peak Oil, effectively that we would run out of readily available petroleum and the price of crude oil would increase from then on. The concept was created by M. King Hubbert, a geologist, in 1954. The underlying fact is that the amount of crude oil is finite, and we must eventually run out of it. Peak Oil Demand, however, is a more subtle concept, based on the idea that, for any number of reasons, we will be replacing petroleum products with other sources, until the demand for crude oil starts to decrease. Currently, the biggest factor pushing in this direction is climate change due to the relentless increase in atmospheric greenhouse gases we are currently experiencing. It is unlikely that Peak Oil and Peak Oil Demand will happen at the same time. The dating of either, however, is not a simple task; Peak Oil has been forecasted many times. For example, in 2010, the UK Energy Research Centre published a paper written by a Stanford professor that we would certainly run out of petroleum at least by 2030, if not by 2020. Multiple other academic papers could be cited. Each time, technology improved to the point that more crude oil could be recovered, invalidating the predicted date of Peak Oil. Peak Oil Demand, however, is harder to estimate. In this commentary, we summarize some of the more credible estimates for Peak Oil Demand. But first, here is a graph of the global proved oil reserves.

Figure 1: The number of barrels of oil equivalent in global proved reserves (Source:Statista)

With the introduction of fracking, all the estimates of proved reserves needed to be redone, since

the amount of crude oil that could be retrieved increased dramatically. It similarly increased the

amount of unproved reserves. In fact, there are now approximately double the number of barrels of oil equivalent (that is, including natural gas) estimated in unproved reserves compared to proved reserves.

The estimates for Peak Oil Demand depend heavily on the assumptions regarding how rapidly technologies can replace the products (including energy) of petroleum products. One of the biggest global uses of crude oil is transportation, and the transition to electric vehicles (EVs) will be a central factor. Since most plastics come from crude oil, it is clear we will need crude oil well into the future. But there is no doubt that Peak Oil Demand will occur, for the same reason that Peak Oil will occur. Finite crude oil resources enforce the transition to alternate sources.

So then, what estimates are out there? Earlier this year, in one of the best-researched articles, Goldman Sachs predicted that Peak Oil Demand is at least a decade away. They say that the demand will hit a peak at 110 million barrels per day (MMb/d) in 2034, and stay there for a while before dropping off (The current crude oil consumption rate is roughly 100 MMb/d). If the EV adoption rate doesn’t pick up enough, the Peak Demand for crude oil could happen in 2040 at 113 MMb/d. The report includes estimates from other sources that are also convincing.

Vitol Group, the largest oil trader in the world, also thinks that the oil market will begin to peak in about a decade, and is diversifying to metals markets. But not everyone agrees with the 2034 date for Peak Oil Demand. Reuters cites French oil major TotalEnergies which estimates that Peak Oil Demand won’t occur before 2035. In that same article, Reuters says that BP is expecting Peak Oil Demand as soon as 2025.

Although Peak Oil Demand is clearly not far over the horizon, all of these estimates come with predictions that the demand for oil will continue to increase until Peak Oil Demand occurs. It seems that the obvious trade is to go long crude oil. However, there is no pure trade on the total amount of oil produced. The price of crude oil is determined by demand, of course, but also by supply. The US is the main supplier of crude oil. Below is a graph of the US production of oil, in 1,000 barrels per day averaged weekly, giving you an idea of how much oil has to be replaced to reach Peak Oil Demand. And various players, such as OPEC+, intentionally ration supply to maintain a certain price range for crude oil. The game will get much more interesting when Peak Oil Demand actually happens, at which time the leverage that OPEC+ wields will shrink dramatically.

Figure 2: Daily US oil production, weekly average, in units of 1,000 barrels (Source: EIA)