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2013-08-06 06:24:36
The world s thirst for oil could be nearing a peak. That is bad news for
producers, excellent for everyone else
THE dawn of the oil age was fairly recent. Although the stuff was used to
waterproof boats in the Middle East 6,000 years ago, extracting it in earnest
began only in 1859 after an oil strike in Pennsylvania. The first barrels of
crude fetched $18 (around $450 at today s prices). It was used to make
kerosene, the main fuel for artificial lighting after overfishing led to a
shortage of whale blubber. Other liquids produced in the refining process, too
unstable or smoky for lamplight, were burned or dumped. But the unwanted petrol
and diesel did not go to waste for long, thanks to the development of the
internal-combustion engine a few years later.
Since then demand for oil has, with a couple of blips in the 1970s and 1980s,
risen steadily alongside ever-increasing travel by car, plane and ship.
Three-fifths of it ends up in fuel tanks. With billions of Chinese and Indians
growing richer and itching to get behind the wheel of a car, the big oil
companies, the International Energy Agency (IEA) and America s Energy
Information Administration all predict that demand will keep on rising. One of
the oil giants, Britain s BP, reckons it will grow from 89m b/d now to 104m b/d
by 2030.
Scraping the barrel
We believe that they are wrong, and that oil is close to a peak. This is not
the peak oil widely discussed several years ago, when several theorists, who
have since gone strangely quiet, reckoned that supply would flatten and then
fall. We believe that demand, not supply, could decline. In the rich world oil
demand has already peaked: it has fallen since 2005. Even allowing for all
those new drivers in Beijing and Delhi, two revolutions in technology will
dampen the world s thirst for the black stuff.
The first revolution was led by a Texan who has just died (see article). George
Mitchell championed fracking as a way to release huge supplies of
unconventional gas from shale beds. This, along with vast new discoveries of
conventional gas, has recently helped increase the world s reserves from 50 to
200 years. In America, where thanks to Mr Mitchell shale gas already billows
from the ground, liquefied or compressed gas is finding its way into the tanks
of lorries, buses and local-delivery vehicles. Gas could also replace oil in
ships, power stations, petrochemical plants and domestic and industrial heating
systems, and thus displace a few million barrels of oil a day by 2020.
The other great change is in automotive technology. Rapid advances in engine
and vehicle design also threaten oil s dominance. Foremost is the efficiency of
the internal-combustion engine itself. Petrol and diesel engines are becoming
ever more frugal. The materials used to make cars are getting lighter and
stronger. The growing popularity of electric and hybrid cars, as well as
vehicles powered by natural gas or hydrogen fuel cells, will also have an
effect on demand for oil. Analysts at Citi, a bank, calculate that if the
fuel-efficiency of cars and trucks improves by an average of 2.5% a year it
will be enough to constrain oil demand; they predict that a peak of less than
92m b/d will come in the next few years. Ricardo, a big automotive engineer,
has come to a similar conclusion.
Not surprisingly, the oil supermajors and the IEA disagree. They point out
that most of the emerging world has a long way to go before it owns as many
cars, or drives as many miles per head, as America.
But it would be foolish to extrapolate from the rich world s past to booming
Asia s future. The sort of environmental policies that are reducing the thirst
for fuel in Europe and America by imposing ever-tougher fuel-efficiency
standards on vehicles are also being adopted in the emerging economies. China
recently introduced its own set of fuel-economy measures. If, as a result of
its determination to reduce its dependence on imported oil, the regime imposes
policies designed to leapfrog the country s transport system to hybrids, oil
demand will come under even more pressure.
A fit of peak
A couple of countervailing factors could kick in to increase consumption.
First, the Saudis, who control 11% of output and have the most spare capacity,
may decide to push out more, lowering prices and thus increasing demand. Then
again, they might cut production to try to raise prices, thereby lowering
demand further. Second, if declining demand pushes down the oil price, drivers
may turn back to gas-guzzling cars, as they did when oil was cheap in the
1990s. But tightening emissions standards should make that harder in future.
If the demand for oil merely stabilises, it will have important consequences.
The environment should fare a little better. Gas vehicles emit less carbon
dioxide than equivalent petrol-powered ones.
The corporate pecking order will change, too. Currently, Exxon Mobil vies with
Apple as the world s biggest listed company. Yet Exxon and the other oil
supermajors are more vulnerable than they look (see article). Bernstein, a
research firm, reckons that new barrels of oil from the Arctic or other
technologically (or politically) demanding environments now cost $100 to
extract. Big Oil can still have a decent future as Big Gas, but that will not
prove as profitable.
The biggest impact of declining demand could be geopolitical. Oil underpins
Vladimir Putin s kleptocracy. The Kremlin will find it more difficult to impose
its will on the country if its main source of patronage is diminished. The
Saudi princes have relied on a high oil price to balance their budgets while
paying for lavish social programmes to placate the restless young generation
that has taken to the streets elsewhere. Their huge financial reserves can plug
the gap for a while; but if the oil flows into the kingdom s coffers less
readily, buying off the opposition will be harder and the chances of upheaval
greater. And if America is heading towards shale-powered energy
self-sufficiency, it is unlikely to be as indulgent in future towards the Arab
allies it propped up in the past. In its rise, oil has fuelled many conflicts.
It may continue to do so as it falls. For all that, most people will welcome
the change.