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By Robert Rapier on Feb 23, 2009 with 1 response

Peak Demand Before Peak Oil?

There has been a lot of talk in the media lately about the possibility that oil demand will peak soon (or has peaked already), which will render a geologically-induced peak in oil production irrelevant. In other words, peak oil is a non-issue because people won’t be demanding as much oil as can be produced (which is true presently). In fact, I just did a Google search of my blog, and the phrase “Peak Demand” shows up 239 times over the past 2 years. Regular reader Benjamin Cole was beating the peak demand meme long before I heard the media start to pick it up. (Here he is arguing this point two years ago).

Over the weekend I saw a new article that argued this point:

Study predicts oil demand will peak well before supplies run out

I think calling this a ‘study’ is being very generous, and I have some big problems with multiple aspects of the article. Let’s have a look:

Management consultancy Arthur D Little has turned peak oil fears on their head with a report suggesting that the global economy will have begun to abandon oil well before supplies peak.

A bit of hyperbole, don’t you think? If anything has turned peak oil fears on their head it has been the collapse of oil prices – not the opinion of someone I never heard of. Hard to be concerned that there is a crisis around the corner when oil prices reflect a belief of an abundantly supplied market.

The Beginning of the End for Oil?, written by Peter Hughes a former executive at natural gas giant BG Group, address the prospect of falling demand for oil, rather than fears over dwindling supplies. It suggests that a mixture of drivers is forcing a broad policy change that will continue to reduce consumption. Fears over climate change, security of supply, and price volatility, will form a holy trinity to drive policy redirection, he said.

There are significant drivers for policy redirection, but working against those drivers is the issue of oil prices. They have already fallen to the point that they have spurred a recovery of demand. This is why I don’t subscribe to the peak demand > peak oil argument. We just don’t have anything that can compete with oil, especially at current prices. Crude oil is like a giant lake of underground energy that nature already did the heavy lifting on. Even though the lakes are becoming harder to access, they are still more economical than processes that require that humans do the heavy lifting (e.g., you have to input a lot of energy to turn straw into a liquid fuel). Peak demand is only going to occur if there are alternatives with low fossil fuel inputs that are competitive. Those are not on the immediate horizon, therefore demand is going to recover before it starts to shift to something else. Because I believe we will reach peak oil before anything is competitive with oil, I think peak oil will occur before peak demand.

Hughes also points to the Energy Information Administration’s (EIA) reduction of long-term oil consumption forecasts last year. It said the world would be using 10m barrels less per day in 2030 than it had predicted previously

Yet still more than we use today. And the current version of This Week in Petroleum reads “Under almost all EIA long-term projection scenarios, global demand for crude oil and petroleum liquids increases through 2030.”

But why does the EIA predict slower growth in petroleum demand? Because they are predicting that the ethanol mandates will result in production of almost 30 billion gallons of ethanol per year in 2030 – most of it cellulosic. (Less than two years ago the same agency was predicting less than a billion gallons of cellulosic in 2030 – amazing how effective mandates are at creating new technology!)

Despite the huge increase in ethanol production, they forecast a very modest rise in natural gas consumption. This begs the question “Where are all the energy inputs going to come from to drive production of 30 billion gallons of ethanol?” Because of the nature of ethanol production – which unlike oil does not comes to us as an underground lake that nature has largely processed – it takes substantial energy inputs to produce finished ethanol. That is not reflected anywhere in the EIA forecasts. It appears that the assumption is that it will take no incremental fossil fuel production to produce this much cellulosic ethanol. The problem is that no such technology has been invented, so the peak demand argument has to rely on new technologies yet to be invented. That is an incredibly weak argument.

Oil industry experts have predicted that any decline in oil demand in developed economies will be more than compensated by increased consumption in China and other BRIC countries as disposable income rises.

But Hughes argues that these emerging economies would be driven by the same desire to cut oil demand that is already being felt in developed economies. “The Chinese think very coherently and very long term,” he said. “They have identified the threat to the long-term sustainability of their growth path by relying increasingly on imported energy.”

I can’t make too much sense of this. China’s plan for long-term sustainability involves relying increasingly on imports? Wow, then the U.S. is really on their way to a sustainable future. We have increased our imports to something like 2/3rds of our liquid fuel needs.

The report has little in the way of numbers, and insiders admit it is more an opinion piece by Hughes based on almost 30 years in the energy business.

That’s pretty obvious.

But Hughes is not alone in predicting that fears over peaking oil supplies are largely unfounded, on the grounds that economies will find replacement sources of energy at a faster rate than the oil industry expects.

Amory Lovins, co-founder of the Rocky Mountain Institute, has been similarly outspoken on the subject of oil demand. “Oil is going to become, and has already become, uncompetitive, even at low prices, before it becomes unavailable even at high prices,” he said in a 2007 Newsweek interview. “So we will leave it in the ground. It’s very good for holding up the ground, but it won’t be worth extracting.”

Yes, Amory Lovins predicts the same. Now there is a great endorsement. As Robert Bryce pointed out in a 2007 article on Lovins, Lovins does not have a good track record with his predictions. Some of his past predictions:

1. Renewables will take huge swaths of the overall energy market. (1976)
2. Electricity consumption will fall. (1984)
3. Cellulosic ethanol will solve our oil import needs. (repeatedly)
4. Efficiency will lower consumption. (repeatedly)

Bryce systematically demolishes Lovins’ predictions in his article, and wonders why people still listen to him.

So I am firmly in the camp that we are going to see a peak in oil production before we see a massive move to alternatives. On the topic of peak oil itself, my current thinking remains as it has for several years. We are close, but not there yet. I have said several times that I expect oil to peak at around 90 million barrels per day (for ‘all liquids’ production). Christophe de Margerie, the CEO of Total, was recently quoted as saying he thought 89 million barrels per day will be the peak. Jim Mulva, CEO of ConocoPhillips, has expressed similar sentiments. After the IEA came out and predicted oil demand of 116 million barrels per day in 2030, Mulva said he didn’t see how we would ever get past 100 million barrels per day.

I do continue to be bemused by those who suggest that oil production peaked in 2005. When I was posting regularly at The Oil Drum, this was an issue that frequently found me at odds with many of the readers. I felt like there was insufficient evidence, and that many of the arguments suggesting an immediate peak were flawed. That didn’t stop people like Matt Simmons and Ken Deffeyes from making definitive statements that peak oil has passed. Both have been saying for several years now that we are past peak. Here’s Deffeyes in February 2006 saying that oil peaked in December 2005 and claiming “I can now refer to the world oil peak in the past tense. My career as a prophet is over. I’m now an historian.JD at Peak Oil Debunked points out that peak oil has been a moving target for Deffeyes. Here’s Simmons in early 2007 saying that the world has peaked. T. Boone Pickens called the peak in 2004. Here’s one of the TOD contributors calling “Peak Total Liquids of 85.52 million barrels/day on Aug 2006.”

So where do things stand? All of these guys were wrong. Per the EIA database, 2008 eclipsed 2005 as far as total oil produced, and the present monthly record is now July 2008 for crude production plus condensate. In the ‘all liquids’ category, daily production in 2008 was about a million barrels per day higher than it was in 2005 at 85.6 million barrels per day (and several months checked in just short of 87 million barrels per day).

If anyone can point me to a place where any of the “Peak Oil Historians” admitted to being in error, I would appreciate it. Prior to the credit crisis I thought we would see peak by 2012 at no more than 90 million barrels per day. With the crisis, it may delay peak by a year or so, but also make it less likely that we make it to 90 million barrels per day. We are certainly knocking on the door of peak oil (IMO), and if someone suggests that for all practical purposes we are there I couldn’t disagree. But I think it demolishes credibility to go on TV and make a claim like “Peak Oil occurred in May 2005.” I have advised people that no matter how sure you are about that, if you stick your neck out and are wrong, you are the boy who cried wolf and your message will lose any semblance of credibility.

At the present time, demand has been destroyed the point that there are several million barrels per day of excess capacity. I think that most of the rise in oil prices since 2002 can be explained by my Peak Lite scenario, which boils down to erosion of excess capacity. When prices got out of hand, significant demand was destroyed and we find ourselves with 2002-like spare capacity. I think going forward, we are going to see the gradual return of Peak Lite. The only question in my mind is when the climb begins. But since I am a long-term investor, I have the patience to wait it out.

  1. By jim on August 6, 2010 at 12:06 am

    Isn’t there an inevitable reduction in economic activity because nothing matches oil in its nature / flow rates – and
    entropy – thus economic activity would inevitably plateau ?

    [link]      
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