Peak oil demand is the point at which the consumption of oil reaches its maximum level before it starts to decline. The timing of peak oil demand is a topic of ongoing debate among firms, analysts, and experts in the energy industry, but major firms and analysts are trending to this decade.
For example, the International Energy Agency (IEA) has predicted that oil demand could peak as early as the mid-2020s. BP’s Energy Outlook has projected that oil demand could peak in the early 2030s. Equinor, a Norwegian multinational energy company, in its Energy Perspectives has projected that oil demand will peak before 2030, and the use of electric cars will play a significant role in reducing oil consumption, however, road transportation will remain a key user of oil-based products. McKinsey, the global consulting firm which deals extensively with the fossil fuel industry, projects late this decade for peak oil demand, and that it could occur earlier.
On the other hand, there are also firms and analysts who believe that peak oil demand is still a ways off. For example, ExxonMobil has stated that it expects oil demand to continue to grow through at least 2040, while the US Energy Information Administration (EIA) has projected that oil demand will not peak until the 2040s.
It is important to note that one of the biggest consumers of energy is the oil, gas, and coal industry, so as other sectors decline in demand, reduction of demand will actually be higher. The best estimate I have of the fossil fuel industry’s energy demand is 11% of global energy, so as oil demand drops by 1 million barrels a day outside of the industry, the actual demand drop will be more like 1.1 million barrels.
Personally, I find the earlier estimates much more credible given the incredibly rapid decarbonization of transportation in major markets like China, which already purchases 60% of the worlds’ electric vehicles, has a domestic manufacturer, BYD, which is outselling Tesla, has built 40,000 km of high-speed electrified rail including linking in neighboring countries Vietnam and Laos through its Belt & Road Initiative, has 500,000 electric buses in its densely populated, walkable, transit-heavy cities, put 400,000 electric trucks on the roads, and of course buys more personal electric vehicles as well. And China is now in the offshore wind game in a big way, having put in as much nameplate capacity in 2022 as the rest of the world combined built in the previous five years. India’s economy is already much lower CO2e per capita than the west or China, and it’s acting strongly to address its emissions.
Similarly, Europe’s transformation this year due to the multiple energy shocks has been a much greater focus on decarbonization. I projected in September that Europe’s energy crisis would be temporary and have strong benefits, and oil demand reduction is one of them. France’s legislation banning shorter flights where rail service is provided is one example of this. Germans buying a lot of electric cars is another.
As I’ve noted, it’s difficult for many analysts and futurists to avoid the availability bias, where what they see outside of their windows and cars every day becomes much more dominant globally than it is in reality. One interesting aspect of this is the International Energy Agency’s suggestion that it could be so early. Traditionally, the IEA has done very poor assessments of the increase in wind and solar energy, key technologies in decarbonization of energy, albeit less so for oil. They did inductive straight-line forecasting instead of accepting that the s-curve of demand increase was in play, and so you could take each of their annual forecasts, overlay them and see the actual curve that they completely failed to forecast. They did this for years before it became so embarrassing that they finally improved their methodology. As the IEA has historically been almost entirely focused on fossil fuels, they couldn’t get their heads easily around renewables.
It is worth noting that factors such as advances in renewable energy, changes in government policies, and shifts in consumer preferences can all affect the timing of peak oil demand. Additionally, the COVID-19 pandemic severely impacted the global economy, leading to a significant decrease in demand for oil in 2020 and early 2021, which further add uncertainty to predictions. I’ve predicted that aviation won’t rebound to 2019 levels immediately due to significant reduction of the 20% of passenger flights for business, as an example of a change which has become structural and will bring peak oil demand forward.
Given Peak Oil Demand, What Changes?
One of the most notable impacts will be economic. The oil and gas industry is a major source of jobs and revenue in many countries. As demand for oil declines, so too will the revenues and profits of oil companies, which will lead to job losses and reduced investment in the sector. The decline in oil industry will impact the economies of oil-producing nations, and also the wider global economy through interconnected supply chains and falling demand for goods and services. Countries with higher percentage of their GDPs, for example Algeria with 15% per the World Bank and Canada at 5-6%, will be more strongly impacted. Oil-heavy countries like Norway that prepared for the end of oil will have an interesting transition, but at least it will be well funded.
Another potential impact of peak oil demand is geopolitical. Oil is a vital energy source for many countries, and its strategic importance has led to significant geopolitical tensions in the past. As peak oil demand passes, global conflicts are likely to increase somewhat as oil rich regions lose market share and become either vulnerable or more belligerent in response. This could be a major concern for countries that depend on oil imports and may need to reassess their energy security policies. As I pointed out in the European perspective, strategic energy interdependence based on HVDC interconnections of renewables-heavy countries will mitigate this substantially.
Energy security is also likely to be impacted as peak oil demand approaches. As demand for oil declines, countries that are heavily dependent on oil exports will see a decline in their revenues, which will make it more difficult for them to invest in alternative energy sources and maintain their energy security. This poses a particular challenge for developing countries that depend heavily on oil exports as a source of income and energy.
Environmental impact is also one of the key concerns, as a decline in oil demand could be a positive development for the environment, as the burning of fossil fuels is a major contributor to greenhouse gas emissions and climate change. But as I’ve noted, the fossil fuel industry is already orphaning wells globally, pushing them into separate corporations which go bankrupt, with no remediation. Alberta alone is already assessed as having $200 billion in unremediated, orphaned oil and gas sites, and that number is likely to go up substantially as peak oil demand bankrupts firms.
These Changes Will Be Unevenly Felt
As peak oil demand arrives, it is likely to have a number of significant implications for heavy, sour crude oil producers like Alberta.
Heavy, sour crude oil is typically sold at a discount to lighter, sweeter crude oils because it requires more processing and refining to make it usable. As demand for oil declines, the price of heavy, sour crude oil may decline even further, which could lead to reduced revenues and profitability for Alberta’s oil and gas industry. This could lead to a decrease in production, as companies may not find it economically viable to continue to extract and produce heavy oil at lower prices.
As I pointed out in late 2021, the quality discount against Brent was already two-thirds of the total $21 discount per barrel. Shipping was only a $7 discount per barrel. As I’ve discussed with energy experts, including ex-Schlumberger global analysts, the first oil off of the global market will be products like Alberta’s crude. It will likely continue to supply the diminishing gasoline, diesel, and aviation needs of the western Canadian domestic market, but as BC is the biggest market for road vehicles and is also the highest adopter of electric vehicles of any jurisdiction in North America, that’s going to be problematic. Expect increasing demands for Pierre Elliot Trudeau’s National Energy Program, creating a guaranteed cross-Canada domestic market for Alberta’s product, something that caused outrage in the 1980s, but now is the only hope for Alberta.
Globally, the oil market will be buying only the lightest, sweetest crude that’s closest to water. It’s cheapest to ship, it’s cheapest to extract and process, it’s cheapest to refine. There’s lots of it, although Russia’s reserves are obviously now deeply discounted due to its invasion of Ukraine, one of many strategic failures on the part of Putin and the Russian federation.
Some oil and gas companies get it. Others, not so much.
Ørsted, previously known as DONG Energy, is a Danish multinational power company that has undergone a significant change in its business model in recent years.
The company was originally focused on fossil fuels, primarily coal and natural gas, but in the early 2000s, it began to shift its focus towards renewable energy, particularly wind power. This shift was driven by a combination of factors, including increasing concerns about climate change and the falling cost of wind energy technology.
In 2016, DONG Energy divested its fossil fuel assets and changed its name to Ørsted to reflect its commitment to a green transition. This was a big step towards full decarbonization, in which Ørsted aimed to be coal-free by 2023, and to be a leading player in renewable energy.
As part of this transition, Ørsted has significantly increased its investment in wind energy, with a focus on offshore wind power, leveraging its offshore oil and gas expertise. The company has invested in several offshore wind farms in Europe and Asia, and it also developed new technologies to optimize the efficiency and performance of offshore wind turbines.
Additionally, Ørsted has also expanded into other renewable energy areas such as solar, energy storage, and green hydrogen, and this diversification will help the company to further reduce its carbon footprint and provide a more resilient business model. The company also made significant steps to improve its sustainable practices in terms of health, safety, and sustainability in the supply chain, and is continuously working on reducing the environmental footprint of its operations.
For contrast, there’s Canadian firm Suncor Energy. It’s a Canadian multinational integrated energy company. It is primarily involved in the exploration, development, production, and refining of oil and natural gas. The company is one of the largest oil sands producers in Canada, and it also has significant interests in conventional oil and natural gas production, refining, and marketing, and renewable energy.
The company’s oil sands operations are primarily located in the Athabasca region of Alberta, Canada. It uses both mining and in-situ methods to extract bitumen from the oil sands. Suncor also has refining and marketing operations in Canada, the United States, and Europe, and it sells its products under the Petro-Canada brand.
Suncor also produces a range of products, including gasoline, diesel, aviation fuel, and lubricants. The company has retail, commercial, and wholesale operations that supply Petro-Canada branded products to more than 6,500 retail and wholesale locations in Canada, and the company also operates and markets more than 1,500 Petro-Pass sites in Canada.
What’s its response to all of this? Well, a little wind and solar, which I know from time at their corporate headquarters in Calgary is only greenwashing, and significantly increased stock dividends.
Fossil fuel companies like Suncor that continue to prioritize stock buybacks and increasing dividends over investing in technologies of the future are putting themselves and their investors at risk for a number of reasons.
From a financial perspective, investing in new technologies and business models is a way for companies to position themselves for growth and profitability in the long-term. Companies that focus primarily on short-term financial gains, such as stock buybacks and dividends, are usually neglecting the long-term health and competitiveness of the firm. I use this as my lens for which oil and gas industry firms are likely to survive the shakeout, with Orsted being at the top of the list, and companies like Suncor at the bottom. The worst offenders in the oil and gas industry are seeing massive defections of often top talent due to this kind of corporate strategy.
From a reputational perspective, companies that don’t invest in new technologies, and instead use their profits to benefit shareholders only, are facing increasing criticism from stakeholders and the public for not contributing to the effort of fighting climate change and working towards a cleaner energy future. This is the era of ESG investing, after all, and recidivist fossil fuel industry firms playing stock market games are likely to be burned.
And this is a caveat emptor moment for corporate and retail investors. Big dividends and stock price strength due to buybacks make the firms look like attractive buys to the unwary, but the current peak will be short-lived, and the coming troughs are going to be deeper and longer. Rebalancing out of oil and gas, especially firms exposed as heavily as Suncor, as peak oil demand looms is a very wise decision that can be masked if the firm isn’t paying attention to fundamentals of the transition. Expect big losses in some portfolios.
Peak coal demand arrived early in the 2010s, although it had a bump back to those levels last year due to the short-lived European energy crisis. Peak oil demand is coming later this decade, and will be felt very unevenly globally with winners like Orsted and losers like Suncor. And peak natural gas is likely in the early 2030s simply because wind and solar are going in so strongly globally, and even offshore wind is cheaper than new natural gas generation.
As Sheikh Zaki Yamani, a former Saudi oil minister, once said, “The stone age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.” But some oil will still be being pumped at the end, and it won’t be heavy, sour, far from water crude.
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