What “Peak Demand”​ really looks like

Summary: Even in a “rapid transition” scenario the world will use over seven hundred billion barrels of oil in the next twenty years. This is more than 50% of the total oil produced since the inception of the industry in 1870. Since we have found and used most/all the cheap oil, inevitably the next 700 billion barrels will be more expensive. Peak Demand may be ahead, but “Peak Cheap Oil” is certainly behind us.

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

A decade or more ago, the world was abuzz with “Peak Oil” scare stories. Since then focus has had a seismic shift to Peak Demand and the concept of “stranded assets” – that is, oil and gas that will be left in the ground as the world transitions away from fossil fuels. The fate of coal is taken as a good guide to how things will play out for oil and gas.

The typical phraseology is along the lines of “if we are to meet the 1.5 degree target, most known reserves of fossil fuels will never be produced”. The logical next step is that divestment is not just a necessary tool to effect the change, but also an obvious economic choice. If Big Oil is sitting on oil and gas reserves that will stay in the ground, then their valuations (based on future earnings) are over-cooked and selling now is the smart thing to do.

But go back and read that again. It all starts with an innocuous “if” statement. If we are to meet the 1.5 degree target. Meeting this target is highly unlikely – I’m not saying it is good or bad – but just looking at the mechanics. However, if the “if” is wrong, then all of the subsequent economic logic around divestment is wrong also.

The main argument in favour of the “if”, is that if the consequences of not meeting the targets are so bad that governments will literally have to act to force the needed change. Regulation will ensure that fossil fuels will indeed stay in the ground. Whilst it is a bit of a diversion to the main point of this post, there is growing awareness that there is a deliberate policy to exaggerate, or present alarmist and/or worst-case scenarios – with the aim of galvanizing opinion and action. This has been pretty successful, if you ignore the small but growing push-back,

Now my own “if-then” statement. If the consequences are not as immediately awful and existential as the alarmists would have, then governments (and populations) will continue to be short-termist and will not enact any such policy. I point to the widespread social unrest coming from relatively minor cost-of-living issues as prima facie evidence (Chile, Lebanon, Ecuador, France, Iran etc).

Energy goes directly to cost of living, politicians back down fast.

The bodies who study the issue of oil demand have broad agreement on how the next 20-50 years will play out, and they try to model various scenarios that cover from “business as usual” to “stated policy” (ie changes that will happen if stated policy intentions are followed) to “rapid or required transition” (ie what would be needed for something like the 1.5 degree target to be met).

What is instructive about all of these is that in all cases the use of fossil fuels does not fall off a cliff (note that in the above the lowest (dark) line is supply with no new development approvals – it is not a demand scenario). Indeed in the more likely scenarios of moderate global economic growth and efforts to transition, use of oil and gas continue to rise for at least two decades. In a more restricted scenario, oil and gas peak (oil first) and then enter a gradual decline. By 2030 oil demand is only marginally less than today and by 2040 would, in this “rapid transition” scenario decline to 82 mmbbls/year. Eyeballing this, that is not far off what demand was in 2008.

Growth in production has been remarkably stable as the world has gone through the fall of the soviet union, the commodity super-cycle, the great financial crash and the era of QE. Demand has been remarkably inelastic with respect to price. In fact you have to go back to the early 1970s to see a clear effect. The decline in demand post 1979 is notable and was driven by huge energy saving measures, but followed a more than 10x increase in prices from in the period 1973-1979. This time it may be different, as demand is projected to peak and decline, not as a function of price, but as a function of a systemic transition away from oil, but in the immediate future it seems reasonable to work with the range of scenarios in the forecasts show above.

Whilst we focus on the headline numbers of say oil peaking at 105 or 108 mmbbls/day in 2030 – or whatever the number is – we should focus on the high-school math problem of the “area under the curve”. In these kind of plots, integration of the area will give you the total volumes represented. You might want to sit down for the next bit.

The Next Bit

Taking just oil – as it is currently still key in the global economy. The total global oil production (and consumption) to date is approximately 1.5 trillion barrels (or 1500 billion barrels). At roughly 100 million barrels per day, the resource base is being consumed at 35 billion barrels/year.

What this doesn’t tell you is just what the current 100 million barrels per day really looks like over time. It’s easy maths: 35 billion barrels/year and thus 350 billion per decade if, as per the projections, demand is more or less stable. In the big scheme of things, fully 47% of all the oil produced/consumed since the start of the industry in the 1870s has been produced/consumed in the last 20 years. Note that in the image to the right, “2010” refers to the decade 2010-2020, similarly for all other decades.

Approximately 50% of all oil ever produced has been produced since the year 2000. That was the year that the Y2K bug didn’t trip the world up, the year that Sydney hosted the Olympics and Big Brother first aired on TV. Bill Clinton was in the White House, the twin-towers still standing, and Tony Blair was prime-minister in the UK and was still (mostly) trusted. It wasn’t that long ago… and yet.

Now back to the Rapid Transition Scenario and guess what? With production decreasing back to c. 82mmbbls/day by 2040, we will need to produce 700 billion barrels in the next two decades (2020-2040), slightly more than the 680 billion barrels, produced in the two most recent (2000-2020).

In the business-as-usual scenario this will be more like 730 billion barrels. I should also note that one needs to subtract the area under the black curve in the Demand and Supply graph at the top of this post – as the declining production from existing and in-development fields will supply a big chunk of this future requirement. In the above, it is approximately 430 billion barrels from “existing” sources. This is a poorly understood number as it depends on the actual underlying decline rate of all the existing fields, as well as assumptions about oil price (higher prices keep fields producing longer). Nonetheless, this is a useful starting point.

Finding Oil Was Easy

Here is the rub. Finding big oil fields is the easy bit. If you were to give a bunch of geoscientists a map of the world and some darts, statistically speaking they would be likely to hit bigger oil fields simply because they are bigger. The reality is of course more complicated given that its not a random process, with geological skills and technology making the dart-throwing much more focused and geopolitical and geographical constraints limiting the available target areas. The story of oil has been one of geopolitical limitations turning attention to geographical constraints, and these being met with technological advances (deep-water, harsh environments etc). Think of it as being like the game Battleships – finding and sinking the big aircraft carrier is relatively probably, the sneaky small submarines are hardest to find…

Ultimately however, the evidence is quite stark: the really big fields have been found.

A modern “giant discovery” of say one billion barrels would be a rounding error on the 100 billion bbl Ghawar field. This is not to say another super-giant is not waiting out there, but it becomes increasingly unlikely as time ticks on. And so far, the data backs up the “finding big fields is easy” idea… either that or geologists 60 years ago were much smarter… And in the meantime, we are producing at historically high rates – not surprisingly the “Reserves Replacement Ratio” looks horrible.

Peak Oil revisited

As I have noted previously, Peak Oil was not wrong, but was just at the wrong time. Even with the known super-giants in Saudi Arabia, Iran, Iraq and Kuwait, and the giants in Russia, Libya and a few others, one feature that is common to most is that these are old and heavily exploited fields. That is not to say that they are ready to fall over (although some might – as per Cantarell in Mexico), but rather to say that late-life fields require good management and helpful fiscals. Russia has recently sounded the alarm suggesting that “Without any tax measures, however, west Siberian output could shrink 17 per cent to 2024, says Vygon Consulting.”

Due to diverse “geopolitical” issues, Iran, Iraq, Libya likely hold significant remaining reserves in known and to-be-found resources, but these remain challenging and again, the “easy” fields have been exploited as a general rule.

Where to find 700 billion barrels

Given the exploration graphs above, a combination of the creaming-curve, geopolitical limitations and under-investment give zero confidence that “conventional” oil will be filling the 700 billion barrel tank. One billion barrels here and five billion there just won’t do it. As noted above, it may be “only” 300 billion new barrels needed, given the existing tranche – but this is still a huge number.

Which brings us to the magic of the US shale. This is clearly a huge resource and is pumping out about 8% of the world’s supply from a standing start of zero a few years ago. The question here is not whether we can expect 8mmbbls/d or 12mmbbls/day (which I have written about here), but whether we can expect 15 billion barrels EUR or 150 billion. The answer is surely just a question of price. And this logic can be applied to the huge known resources in other shale plays (Vaca Muerta – reportedly 3x the potential of the Permian) as well as the massive accumulations in Venezuela, Canada and even Madagascar.

So Peak Oil is just a story we tell people to scare them; there is lots of oil. However, if we stop and take a breath – the one thing that US shale and all the other huge known resources have in common is cost. Shale and oil-sands have high energy input costs (and consequently high Co2/bbl footprints, a consequent low EROEI and a high cost. If the demand is there and the carbon question is ignored, these could theoretically be exploited.

So Peak Oil is still over the horizon, Peak Demand is likely very real, but still requires a vast quantity of oil in the next 20-40 years. What we have clearly seen is Peak Cheap Oil.

Probably the very best reason to rapidly transition to a maximum of renewable energy (which can be built subsidized by current cheap energy inputs), is to delay the day we have to face an ever increasing price of our most critical energy resource.

Use the remaining cheap(ish) oil wisely to maximize the support it provides to modern society.

As Yale’s Chief Investment Officer David Swensen said last year; “If we stopped producing fossil fuels today we would all die” (fuller quote below)

“If we stopped producing fossil fuels today we would all die. We wouldn’t have food. We wouldn’t have transportation. We wouldn’t have heat. We wouldn’t have air conditioning. We wouldn’t have clothes…It’s very nice to protest the fact that we have fossil fuel producers in the portfolio, but the real problem is the consumption, and everyone of us…is a consumer.”