Excerpted from the Wall Street Journal, May 21, 2017

 

Get Ready for Peak Oil Demand

There’s a growing consensus that the end of ever-rising consumption is in sight. The big question that many oil companies are debating: When?

 

The world’s largest oil companies are girding for the biggest shift in energy consumption since the Industrial Revolution: After decades of growth, global demand for oil is poised to peak and fall in the coming years.

New technologies that improve fuel efficiency are starting to push down the amount of gasoline and diesel that’s needed for transportation, and a consensus is growing that fuel demand for passenger cars could fall as carbon rules go into effect, electric vehicles gain traction and the internal combustion engine gets re-engineered to be dramatically more efficient. Western countries’ growth used to move in lockstep with their energy consumption, but that phenomenon is starting to decouple in advanced economies.

While most big oil companies foresee a day when the world will need less crude, timing when that peak in oil demand will materialize is one of the hottest flashpoints for controversy within the industry. It’s tough to predict because changes to oil demand will hinge on future disruptive technologies, such as batteries in electric cars that will allow drivers to travel for hundreds of miles on a single charge.

Hitting such a plateau would mark the first time that demand has declined even when economies are growing since Col. Edwin Drake jury-rigged a pipe to drill for oil in Pennsylvania in the late 1850s. Yet, for many companies and investors, the question isn’t whether this immense turning point will happen—it’s when.

Getting that timing right will separate the winners from the losers, and it has become a major preoccupation for energy economists and a flashpoint for controversy within the industry.

Forecasts for peak oil demand diverge by decades. The Paris-based International Energy Agency argues that demand will grow, albeit slowly, past 2040. And the two biggest U.S. oil companies, Exxon Mobil Corp. and Chevron Corp., say peak demand isn’t in sight.

But some big European producers predict that a peak could emerge as soon as 2025 or 2030, and they are overhauling their long-term investment plans to diversify away from crude oil. Royal Dutch Shell PLC and Norway’s Statoil SA are placing bigger bets on natural gas and renewables, including wind and solar.

“Nobody knows” when demand will peak, says Spencer Dale, group chief economist for BP PLC, which issues a widely watched annual outlook. The company’s base case calls for a peak in the mid-2040s—with the caveat that it could come sooner or later. “There are huge bands of uncertainty around that,” Mr. Dale says.

The uncertainty stems from a host of variables, including the pace of technological changes that will make renewables and electric vehicles more cost-competitive; the toughness of new regulations aimed at curbing greenhouse-gas emissions and climate change; and the rate of economic growth in developing countries, which is currently driving the increase in oil demand.

Those factors are making it much harder to predict long-term demand than in the past, according to many energy-industry executives and economists.

Calling it accurately is high stakes for an industry sitting on trillions of dollars of crude-oil reserves. Whenever it finally does happen, the tipping point from global oil-demand growth to decline will reverberate through the energy world, knocking down oil prices and some companies’ shareholders.

The idea that electric vehicles and alternative forms of energy will increasingly displace crude oil is one that big-name investors are starting to ask about.

“We have lots of clients in the financial sector asking about peak demand,” says Linda Giesecke, research director at Wood Mackenzie, an energy consulting firm. “It’s because you have this threat of disruptive technology” such as electric vehicles, she says. “If it is disruptive, it will come fast. That’s why it’s so hard to forecast.”

Case in point: Shareholders of Occidental Petroleum Corp. voted this month to ask the company to assess long-term impacts of climate change on its business. It was the first time such a proposal passed at a major U.S. oil-and-gas company. BlackRock Inc., the world’s largest asset manager, supported the resolution, marking the first time it went against management wishes to support such a climate resolution.

 

 

 

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