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US Foreign Policy (Dr. El-Najjar's Articles)
There Is No Such Thing As Peak Oil Demand
Oil Price, April 3, 2017
Notwithstanding that oil demand has increased for over 150 years, it
will eventually stop increasing. If oil demand were to reach an actual
peak, then the top might be easier to predict. As it stands, the
forecast models of demand are likely predicting peak demand far later
than it will be.
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The so-called balance of supply and demand has
always been a moving target, a race to the top in which the two run neck
and neck. Imbalances result from out-of-step growth rates and not from
movements away from a stationary balance. Perversely, imbalances breed
further imbalances as the supply and demand components are provoked in
opposite directions but with different timing, magnitudes and inertias.
Without sufficient damping, the market has often overcompensated. Of
course, there are also exogenous events like political turmoil, policy
shifts, technological innovations and demographic changes which can
unexpectedly and significantly alter not just the immediate balance but
fundamentally shift the way supply and demand curves respond to price
movements. The trends are plagued by inherent and irreducible
Such a structural change has recently occurred.
High prices persisted long enough for the industry in the U.S. to build
a larger fleet of modern rigs and to learn how effectively to
hydraulically fracture shale wells. It also persisted long enough for
new efficiencies to incubate towards maturity, and the Paris accords
promised to further reduce carbon emissions through policy changes. By
the time that Saudi Arabia finally
acted to protect not only its place among suppliers but also, and
more importantly, the role of oil in the world economy. The backbone of
shale supply in the U.S. was strong, and the seeds of lesser use were
established. After these fundamental shifts, the rest of the world
realized what Saudi Oil Minister Al-Naimi argued long ago and what Shell
Oil has more recently asserted, namely that peak demand will occur long
before peak supply.
To understand the trajectory of demand
growth, we turn to econometric models like those published by the EIA
and IEA. The central problem with long term supply and demand models is
that they require assumptions about the many and interrelated responses
to today’s prices. Though modeled responses may be tuned with low
precision to relatively recent events and new realities, the actual
response curves are poorly constrained and continue to evolve, in some
cases at an accelerating pace. As the aphorism goes, all models are
wrong, but some are useful.
The EIA, IEA and other public
econometric models call for global oil demand to continue growing
through 2040, and the EIA even calls for renewed growth in the U.S. and
OECD demand. The forecasts of growth in global demand rely upon
increased use by developing countries, most importantly China and India.
On the other hand, the United States has already seen demand decline for
about 13 years. In fact it was the second to last of the world’s seven
major developed countries to enter demand decline, and the entire OECD
group of countries has, as a whole, seen shrinking demand since 2007.
EIA data shows that 35 countries in all have already reached and
descended from maximum oil demand. The experience of projected versus
actual peak oil demand in the U.S. and OECD countries provides an
empirical test and thus context to evaluate the current forecasts of
growth and delayed maximum.
The following chart compares actual
oil demand in the U.S. to several relevant demand forecasts of the EIA,
all data coming from the EIA itself. U.S. demand reached a plateau for
four years ending in 2007. Before, during, and even after the actual
maximum demand, the models predicted decades of growth.
chart shows the same kind of comparison for the IEA’s models of OECD oil
demand. Actual demand gently achieved its maximum in 2005. Even the
alternative policy (lower demand) case in 2006 failed to capture the
impending decline, but the reference cases adapted to the reality of
declining demand much more quickly than did the EIA. Still the IEA over
predicted the actual demand. Though not shown in charts, the EIA’s model
of OECD demand growth and the IEA’s model of U.S. demand growth follow
the same patterns. In short, these deeply technical and widely used
referenced models missed badly the pivot point, the watershed of the
object of analysis. For truly exculpatory reasons, the second and third
order dynamics of reality were not captured by the models.
Rather than the theoretical calculation by such models, empirical
observation of history is likely more informative when it comes to
anticipating the timing of maximum demand. The graph below normalizes
annual oil demand from the G7 countries with the U.S. shown in black,
each normalized to its own year and volume of maximum demand. The scales
show a 15 year window around the maximum annual consumption, and the
pattern of the G7 is repeated in the OECD total and in most all of the
28 other countries.
The same data viewed on the scale of
generations may resemble an alpine peak, but from the experience of
living through it, demand does not peak. It sputters, surges and stalls
as it rolls over from a slow incline into a slow decline. It is less a
peak and more a crest of demand.
Sequential global demand
forecasts over the last decade have projected slower growth, mostly now
forecast at less than 1 percent, and sensitivity cases now allow for the
possibility of substantial demand decline by 2040. Unfortunately,
experience demonstrates that the crest will likely occur unexpectedly
and sooner than predicted. And then our industry enters a whole new
world as the moving balance of supply and demand turns into a race to
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