Is the World Facing “Peak Demand” Rather Than “Peak Supply”?

For at least 100 years the world has been anticipating the “rapid exhaustion” of crude oil supplies. Will we continue to be as concerned in future years as we have in the past?

“Peak Oil”, the idea that global oil production would soon reach a maximum and then begin to decline, attracted a significant number of believers in the 1900s and early 2000s. The concept of Peak Oil developed from a theory put forth by American geoscientist M. King Hubbert in 1956. Based on overall reserve estimates and the pattern and history of field discoveries in the United States, Hubbert created a composite, mega-decline curve that predicted U.S. crude oil production would peak in the 1965-1970 time period, then continue to decline to ultimate depletion of the resource base.

And U.S. oil production did reach a peak, a little later than the original Hubbert curve predicted. But with the discovery of North Slope oil in Alaska in 1968, production began to increase again. It now appears that Hubbert’s approach predicts a profile for conventional oil production in a defined geographic area, under specified technological and oil pricing conditions.

In 2008, “unconventionals” happened. The combined technologies of horizontal drilling and hydraulic fracturing (“fracing”), when applied in shale and tight sand reservoirs, unlocked billions of barrels of oil and natural gas that had never been producible before.  Suddenly, hydrocarbon production in the U.S. began to increase. With rising crude production, the U.S. stopped soaking up the world’s excess oil supply.

Instead of cutting back crude production to balance the market, Saudi Arabia increased production to protect its market share. The result was a global glut of crude and liquids, along with a truly major price collapse.  Today you’re more likely to hear people talk about a possible worldwide peak in oil demand than a peak in oil production. One oilman quips, “The world keeps not running out of oil.”

But the principal arguments of Peak Oil haven’t changed much. Proponents of a production maximum point out that the worldwide discovery of giant and supergiant oilfields peaked in the 1960s and has been falling off sharply since then.  As more and more of those giant oilfields go into decline, they say, world crude production inevitably will decline as well.

Also, recent international exploration results haven’t been pretty. “Oil discoveries declined to 2.4 billion barrels in 2016, compared with an average of 9 billion barrels per year over the past 15 years,” the International Energy Agency (IEA) reported in its Annual Outlook.

“Meanwhile, the volume of conventional resources sanctioned for development last year fell to 4.7 billion barrels, 30 percent lower than the previous year, as the number of projects that received a final investment decision dropped to the lowest level since the 1940s,” according to the IEA.

One of the most consistent statistical trends through many years has been that worldwide oil demand growth has been about one million barrels per day each year. Even with a substantial increase in the development and consumption of renewables, the trend of increasing oil demand is likely to continue.  Most of the world’s developing countries have few alternatives but hydrocarbons to provide the transportation and electrical generation fuels to build their economies.

When people ask “How much oil is there?”, the answer must always be “At what price?” Exploration and development of natural resources are ultimately determined by anticipated future product prices, and even small changes in their direction can strongly influence development decisions.

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