Old thinking predicted a limit on how much crude oil the world can produce annually:
Newer thinking said the world is going to have plenty of crude oil production but will reach a limit on the amount of crude consumed per year:
The newest thinking sees oil demand reaching a maximum, falling off to some degree, then remaining at a fairly high level:
The Demand Plateau.
Refining is a key component in crude oil demand, commonly referred to as the "call on crude” in the refining business. As we know, refiners as a whole aren't having any trouble getting oil right now, with the world still in a position of crude surplus.
Stephen Jones serves as vice president on the refining and marketing business side for IHS Markit in Houston. He said some types of crude oil are less expensive to produce and generally available; other types are relatively expensive to produce and come into the market when oil prices rise.
"At a given point there is plenty of crude available, in either case,” Jones said. "When you kind of work it all through, that supply outlook is really an outcome of the market.”
While rising oil prices encourage production of crude, high prices also slow demand growth and reduce crude consumption.
"Our views are that demand drives the price of crude, and crude will be available,” Jones said, but warned "the price can rise to a level that can temper demand growth or even kill it.”
Eventually, he said, the world reaches a level where oil prices cause a plateau in demand.
Nobody knows exactly when that will happen. The International Energy Agency (IEA) is on record saying that Peak Demand won't happen until sometime after 2040, and recently predicted that global oil supply could struggle to keep pace with demand after 2020.
"We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go,” said Fatih Birol, the IEA's executive director.
"We don't see a peak in oil demand any time soon. And unless investments globally rebound sharply, a new period of price volatility looms on the horizon,” Birol added.
Jones said IHS Markit sees demand easing out earlier than that. "We aren't calling for a bend over, a fully definable peak,” he said, "but between late 2035 to 2040, you start seeing demand growth flattening and possibly even declining slightly.”
That doesn't mean the refining industry is in trouble, said Sandeep Sayal, senior director on the refining and marketing business side for IHS Markit. For one thing, demand for petrochemicals is expected to grow strongly.
"We're fairly bullish. The word on the street is, ‘This is the end of the refining industry. All these electric cars are coming into the market.' But, the refining industry will be needed,” Sayal said.
"In terms of petrochemical demand, I think Asia will be the marker, in terms of plastic, clothing, materials,” he noted.
Whether or not they think Peak Demand will happen, and when it might happen, industry observers generally agree that demand will slow significantly in highly developed countries but will continue to increase in Asia and developing countries.
"People think of the plateau of demand as homogeneous or similar in all regions, but that's really not the case,” Jones observed.
"The mature markets, being the U.S. and Europe, will decline and accelerate the decline earlier in the cycle,” he said.
Last year the global consulting firm McKinsey & Company issued an outlook on Peak Demand for crude oil, based on six assumptions:
- Emerging and developing countries will drive all growth in energy demand, while European and North American demand will decline.
- Growth in global energy demand will decelerate to 0.7 percent per year through 2050.
- Chemicals will grow at more than double the rate of total energy demand, while light-vehicle demand will peak around 2023.
- Demand for electricity will outpace demand for other energy sources by more than two to one. Solar and wind will represent almost 80 percent of net added capacity and 34 percent of generation by 2050.
- Fossil fuels will dominate the total energy mix through 2050, but their share of total energy will decline to 74 percent from 82 percent.
- Energy-related carbon dioxide emissions will flatten and start to decline around 2035 as a result of the transformation of light vehicles, with more-efficient combustion engines and more electric vehicles on the roads, and the shift to wind and solar in power generation.
At this point, McKinsey isn't forecasting a peak in crude oil demand, said Scott Nyquist, senior partner in global energy practice for the firm in Houston.
"In our reference case we don't have it happening. It's not in our base case,” he said. "We still have demand growth for the reasonable planning period.”
But he isn't ruling Peak Demand out.
Substitution of oil use by natural gas and other energy sources, projected growth in hybrid and electric vehicle sales, subsidies for renewables and energy efficiencies – all point to reduced demand growth for crude, Nyquist noted.
"Now when we see what's been going on with battery development and with subsidies, that leads to an outcome in our model where we do hit peak demand for transportation fuel by 2025,” he said.
Today's White House might favor oil production over subsidies for renewables, but that won't have much effect on the global picture, according to Nyquist.
"All kinds of countries are continuing to put in subsidies. Norway is an extreme example for electric vehicles,” he observed. "You look back at solar, we had subsidies in Spain, we had subsidies in Germany, then we had subsidies in California, and that kept growing the volumes.”
People who didn't expect renewables to claim any significant percentage of energy production simply misjudged the effect of subsidies and regulatory intervention on the industry, Nyquist said. With support, that industry has been able to move down the learning curve.
"For a lot of the solar and wind side, they're over the hump now, so to speak. They're able to grow without subsidies – they have a lot of momentum,” he said.
In power generation, recent numbers show lowest-cost solar starting to approach natural gas in cost-per-kilowatt hour.
"Four or five years ago we would have said that gas would have an advantage over solar for a long time. And here they are competing,” Nyquist said.
Economic Energy Efficiency
McKinsey also has forecast growing efficiency in the energy intensity of the world economy, the amount of energy required to boost gross domestic product (GDP).
"Accounting for all sectors of the economy, the energy intensity of global growth will fall by 50 percent through 2050,” McKinsey predicted.
Jones agreed that efficiencies in energy use for economic output add up to another factor pointing to slower demand growth.
"In energy intensity, in terms of cost per unit of GDP, we have an amazing record,” he said.
A shift toward increased refining capacity in the Middle East, Asia and parts of the developing world, combined with more trade and competition between refining centers, could mask some of the changes in global product demand, Sayal noted.
For example, he said, in the period 2012-20, Saudi Arabia expects to increase refining capacity by 1.2 million barrels a day.
"By the same token, the (existing) refineries that are not so efficient, they could be under some threats from imports from other countries and markets,” Sayal observed.
Changes in vehicle efficiency and use, particularly in cars and other light vehicles, also figure into the IHS Markit outlook.
"India and China are taking some leaps based on the pollution you see in both countries. In China by the 2020s you see the effect of LNG coming into the trucking market. In India you see smaller and more efficient cars coming into the growth,” Sayal said.
But Jones said the big picture doesn't include an overall drop-off in vehicle miles, even if some of those become miles ridden in semi-autonomous vehicles instead of miles driven. Global vehicle ownership is on the increase and mobility will become more affordable for more people as technology improves and ride-hailing and car sharing services develop.
"What will happen is that the amount of driving will go up. People won't be destined to have to ride on a fixed rail. They'll have more ability to go directly from point A to point B,” Jones said. "We'll have efficiency gains, but the total ridership will rise.”
Projections of Peak Demand timing range from "sometime in the next decade” to "never.” The oil industry is following the issue closely because of the whispered possibility of "oil left in the ground.”
Said the IEA's current outlook:
"A combination of sustained high prices and energy policies aimed at greater end-use efficiency and diversification in energy supplies might actually mean that peak oil demand occurs in the future before the resource base is anything like exhausted.”