Monday, 25 November 2013

Peak oil DEMAND!

Peak oil DEMAND theory is the counter point to 'peak oil theory' which generally describes a supply side phenomenon. Peak demand, in a literal sense, purports that the level of demand has or is near it's peak level and will soon decline. More nuanced versions might suggest, similar to (but the opposite) of my definition of the Peak Oil Dynamic, that the demand side will be the driving force of the oil market going forward.

This article in the Globe and Mail seems to tacitly imply the validity of Peak Demand, suggesting that it, along with political/social activism, might lead to permanent declines in consumption.

Oil's Biggest Problem? A new 'peak' worry
Five or six years ago, peak oil was the peak worry as prices galloped ever higher.
As it rose to almost $150 (U.S.) a barrel, Goldman Sachs boldly predicted that $200 oil was possible. 
So the notion of peak oil that the author use is likely the more doomsday type of scenarios where price would sky rocket in the near term, economies would grind to a halt, etc., etc. Fair enough. I've never been a proponent to that. The Peak Oil Dynamic that I find interesting is less concrete in time lines and agnostic to the social and economic impact of it's implications (ie. I make no doomsday mad max type of predictions).

I would suggest that the 5-6 year time scale used int he article is a bit problematic, but required to hold the Peak Demand worldview. Failing to account for the run up in prices between 2000-2008 where the historical price band around the $25 range gets left behind, would certainly leave the Peak Oil Dynamic world view with plenty to example. But is there a logical reason to omit this period? The author doesn't offer one up. I think that should be required.

Visually, this graph is just so compelling to me. Scrubbing out the huge dislocations around the global financial meltdown and you have a pretty clear trend at work. Factoring in the depressed economic conditions of Europe, and the stagnant and anaemic economic conditions in the rest of the developed world seems to beg for a fundamental shift in the markets. Is this suggestive of Peak Demand? I just don't see it. Peak American consumption maybe, peak European consumption maybe, but globally? The green bar is the total consumption.

I drew up this graph to support my belief that the reduction in developed world consumption is more likely a result of the economic meltdown in the developed world then due to price elasticity or innovation. Between 2000 and 2008 the annual price of oil increased from $27 to just under $100.  By 2008 there were no materially changes in consumption levels in Europe or America. Japan however, which has been stagnating economically for decades, did see a decrease in consumption levels. 

The decrease that we're seeing for 2012, despite the similar price of oil, has coincided with the global economic/financial meltdown. Are we ready to claim efficiency/innovation/substitution as the dominant effect? We would have to assume that this process just lagged the run up in prices and we are only now seeing the impacts. We'd have to assume that consumption levels will continue to fall as elasticity adjustments take effect. I think this is plausible, and that oil consumption, at some level, gets baked into an economy based on it's capital stock and investment.  But as the dominating impact on oil markets? I don't buy it.

I aggregated India and Africa for ease of graphing. But the trend in both Africa/India and China are clear. Straight up increases despite the global meltdown and run up in prices. How high will these consumption levels go? Who knows. But, to me, speculation without consideration of the per capita levels involved really limit the plausibility.

I didn't have any data aggregated for Europe, but the point seems clear to me. Any discussion about which effects will dominate oil markets must include a discussion on the developing world's ability to grow economically. Per capita Consumption and Per Capita GDP levels are still so low that I didn't even include Africa or India's numbers because the data points are sadly to close to the origin point to be useful. For get causation for now, but the correlation is pretty obvious. Unless we replace oil, economic growth will coincide with oil consumption growth.

Back to the article:
Then, suddenly, it wasn’t possible. The financial crisis and deep recessions everywhere sent the price plummeting. You don’t hear much about peak oil anymore, even though both the Texas and Brent prices are treading on either side of $100, well more than double the low reached in 2008 and 2009. For that, credit – or blame – slowing global growth, rising exports from Iraq and Libya, technology that can suck oil out of inconvenient places and surging U.S. shale-oil production.
This is a bit confusing to me. And it's probably just semantics. But the concurrence of $100 oil prices and slowing global growth, rising Iraqi and Libyan production, and significant supply side innovation would have seemed absurd in the early 2000s. Can Peak Demand square that? I don't see how. Thus the 5 -6 year time frame is required again. Anyone offer some thoughts on why we'd ignore that period? I'm quite willing to change my mind.
If you’re an oil company or investor, it’s probably dawning on you that peak oil – the point at which geology and technology dictate the maximum rate of production, after which decline sets in – will not determine future oil prices
 At the end of the day, at least at some level, Peak Demand must suggest that the dominant determinant of price will come from the demand side and will exert downward pressure. Never mind the $27 to $100 price movements, the failure of supply to increase despite these price incentives or that aggregate consumption levels are adequate to support this new market reality.
The peak demand theory, while plausible, is a little too pat. That’s because the oil markets face a bigger known unknown (to borrow an expression used by former U.S. defence secretary Donald Rumsfeld) in the form of unburnable carbon. 
The authors skepticism does not stem from any of the factors pushing the Peak Oil Dynamic as I've described it, but because political and/or social constraints that would leave much of the oil in the ground. I'm pretty skeptical of this. If society wanted to make the sacrifices required to leave oil in the ground. They'd have made the sacrifices to leave oil in the ground. We're seeing plenty of activism against the oil sands which perhaps is the first domino to fall. But until I see developed world per capita consumption falling significantly, or voters pushing for the re-pricing of carbon (which I'd actually be open to) then I'll remain pretty skeptical.
Put the peak demand and a yet another “peak” – peak carbon – together and you have a scenario that should send waves of anxiety through oil and coal companies and their investors. The share prices do not reflect either of the two risks, suggesting that investors rightly do not believe oil use will fall, or that they’re deluded. Energy was always a volatile investment, prone to cycle swings. The next swing could be down forever. (emphasis mine)
This one kind of threw me off. This seems to imply the author's belief that the physical quantity of oil consumed will not infact be going down.

Accepting that the falling consumption in developed countries is driven by innovation and efficiencies, that it will be politically feasible to impose the type of market discipline required to meet climate 'obligations', and assuming away the need to explain the historic run ups in prices can get us to Peak Demand.  However, it just doesn't add up to me.

What We Know:

- developed country demand has fallen in the past few years
- developing country demand has risen
- aggregate demand continues to rise
- the price of oil seems to have stabilized in the $90-$100 range
- conventional crude production has been largely stagnant

Here are a few predictions for the future that I think would contradict the Peak Demand world view:

- developed country demand reductions will be more then offset by developing country demand
- conventional crude production will not increase materially
- resulting in either aggregate demand increases (supplemented by non-crude sources) or price will increase (markets are supply constrained)

The inverse would certainly blow up my world view. Ultimately I do believe that we'll have peak demand at some point. But it will not result from any existing technology, or political/social activism, or true abundance of oil supply. It will be a result of a massively disruptive technological leap that will actually make renewables economically feasible.

Until that happens, don't hold your breath for Peak Demand.

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