Peak Oil vs Peak Oil Demand

The pandemic has given us an opportunity to understand the impact on the oil and gas industry if we switched from driving cars with Internal Combustion Engines (ICE) to non-ICE vehicles (electric or hydrogen powered vehicles). While the sudden drop in oil demand due to the pandemic is not a realistic scenario, the gradual reduction in oil use for gasoline will be a scenario that will play out in the future. This leads to the question of when Peak Oil Demand will occur and what will that scenario look like. 

When discussing Peak Oil Demand (or just Peak Demand) we should first back up to Peak Oil. Peak Oil is the theoretical maximum rate at which global oil will be produced. This peak could be reached in two ways 1) oil reserves are finite and we reached the maximum production rate that can be sustained by dwindling supplies 2) oil reserves are very large but the cost to produce them becomes too high and they are replaced by a cheaper source of energy.

Marion King Hubbert is credited with starting the discussion about Peak Oil when he published a paper in 1956. Hubbert stated that oil reserves were limited and using statistics and probabilities, he determined that the US Supply would reach a maximum production rate in the early 1970's and that global production would hit a maximum rate in the early 2000's. The following chart is the Hubbert Curve for global oil production

Figure 1: M King Hubbert Peak Oil Curve for Global Oil Production
(Source: Wikepedia, https://en.wikipedia.org/wiki/Peak_oil)

In 1956, Hubbert predicted that global oil supplies would have a maximum rate of 34.2 million barrels of oil per day (BOPD) and then begin to fall off. The reality is that in 2019 global oil production was nearly 100 million BOPD and we had an oversupply of oil on the market. The next chart shows Hubbert's prediction for US oil production and actual oil production.

Figure 2: M King Hubbert Peak Oil Curve for US Oil Production
(Source: Wikepedia, https://en.wikipedia.org/wiki/Peak_oil)

Initially, Hubbert's predicted oil production matched actual US production. This gave way to many doomsday prediction about very limited supplies and skyrocketing oil prices. Hubbert was wrong because he did not know or understand what technologies would be discoveries that would lead to many conventional oil discoveries and the release of oil from unconventional(Shale) formations.

While oil supplies are finite, it's unlikely that we will run out oil in the near future. There are too many sources of oil available at the moment, which is driving prices down.  We will likely experience peak oil production within our lifetime as the demand for oil is reduced. 

The idea of peak demand has gained traction in recent years due to the emergence of electric vehicles and the shift to using renewable energy sources. Since nearly 50% of global oil production goes toward road fuels, peak demand will occur as electric vehicles regularly replace ICE vehicles. The following figure shows the oil demand and the impact from COVID-19

Figure 3: Rystad Energy Global Oil Demand and COVID-19 Impacts
(Source: Rystad Energy COVID-19 Report, 13th Edition, June 2020)

In Figure 3, Rystad Energy shows that global oil demand for road fuels was nearly 50 million BOPD. In April, the demand for Road fuels was reduced by nearly 17 million BOPD due to COVID-19 impacts. This sudden loss in demand resulted in very low prices (negative prices) as the supply greatly exceeded demand. In a peak demand scenario, the oil supply will always have the potential to exceed demand, and low oil prices will likely remain an issue. 

Once we hit peak demand, there will still be a lot of work for the oil and gas industry. The following figure shows 2 scenarios from Rystad Energy about the potential for peak demand

Figure 4: Rystad Energy Peak Demand Scenarios
(Source: Rystad Energy OilMarket Analytics, UCube, ServiceDemandCube - March 2019)

In these two, pre-COVID-19 scenarios, peak oil could be reached in 2027 or 2037. If we reach peak demand in 2027, oil production will likely be 100 million BOPD. If we reach peak demand in 2037, oil production will likely be 110 million BOPD. In both cases, oil production flattens out and slowly begins to decline. We will have several years of finding, developing and producing 100 million BOPD before we see the slow decline in production. While we have lots of supply ready to go to the market today, we need to continue to search for additional supplies to meet future needs.

I would expect that the longer term scenario is more likely due to trends in the US Auto Industry. In 2020, it is estimated that there is 287 million registered vehicles in the US. The replacement rate of vehicles (old vehicles leaving the market vs new vehicles entering the market) is estimated to be 15 million vehicles per year (Approximately 5% of the market retires and is replaced every year). 

Based on these numbers, it would take approx 20 years to replace all of the current vehicles on the road (5% every year times 20 years = 100% replacement). The average age of cars in the US continues to increase due to the replacement cost of vehicles and the reliability of current models

In 2019, 330,000 plug in electric vehicles were sold in the US. This represents 2.2% off the 15 million vehicles that were replaced in the market in 2019. If all of the cars sold per year were electric, it would take 10 years for electric vehicles to make up 50% of the US market. Even then, 50% of the market will be driving vehicles that require gasoline.

Everyone reading this will probably witness Peak Oil and Peak Demand in their lifetime. Those of us still working in the oil and gas industry will be faced with many challenges as we try to find new sources of oil in a world where demand for our product is shrinking.