Peak Oil Demand: Everyone's Placing Their Bets - They're All Wrong

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Summary

Why the Paris agreement will have no impact on oil demand.

Peak oil demand projections are nothing more than throwing dart at a dart board.

International Energy Agency guesses oil demand won't peak until 2040.

Markets that will require more oil for decades and longer.

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source: Stock Photo

The latest sport among various agencies and pundits is to lay out their outlook for when demand for oil will peak, with a range from five years to 40 years being thrown out there.

Some clueless writers even point to the 2015 Paris Climate Change Agreement, which recently went into force, as a catalyst in slowing demand. I'll dig into that later in the article as to why it's completely irrelevant to the oil industry and oil demand going forward.

When looking at the various estimates for peak oil demand, search for reasons behind them. For example, Shell's prediction, which is far shorter than others noted in this article, is without a doubt tied into its working together with others concerning a renewable energy investment fund. Here are some of the predictions:

Shell, which is the shortest of the recent projections, says peak oil demand will be reached by as soon as 2021.

Next is OPEC. It recently stated peak oil demand will occur in a little over a decade.

The World Energy Council is looking for oil demand to peak before 2030.

The IEA recently stated it believes oil demand will continue to grow through at least 2040.

Quite honestly I believe all of them are wrong, and the celebration by proponents of the 2015 Paris Climate Change Agreement are premature in their optimism, as we'll look at now.

The 2015 Paris Climate Change Agreement doesn't matter

The reason I'm focusing some on the 2015 Paris Climate Change Agreement, which recently went into force, is because numerous writers are pointing to it as a key catalyst in predictions concerning peak oil demand. When the deal was made it was hailed as a great breakthrough, when in reality it's only symbolic and nothing more.

While little in the way of funding alleged to be needed to make the required changes will be allocated, when measured against the $16 trillion being bantered about, the most important element of the treaty is what isn't there, and that's why it's a meaningless document to make some people feel good.

I'm talking about the lack of penalties or sanctions inherent in the treaty. What that means is this really isn't a treat at all, but in fact a suggestion countries can choose to ignore, and ignore it they will.

If there are no penalties for not complying to the treaty, it isn't a law. It's as simple as that. No institution is in place to bring the parties signing the agreement into compliance with it.

The funding won't come at proposed levels, and there is nothing to enforce the ambitious group of suggestions the treat represents. For that reason investors can safely disregard this as meaningful to peak oil demand, and invest under the assumption the market will remain the key determinant of oil demand.

So when continuing to read about this treat with no teeth, keep repeating the fact it legally binds no country to adhere to the deal, even though they signed it.

This is really very low on the concerns of people around the world, contrary to media coverage, because temperatures have remained flat for about 18 years. Relatively few see it as a real crisis, even with excessive media reports suggesting otherwise.

Auto and truck demand for oil

Easily the major focus on oil demand is in regard to automobiles and trucks, where it appears there has been some headway made in reducing reliance on oil. There may be some truth to that, but it has to be taken in light of global demand for consumer and business transportation is climbing, and even if there are more vehicles using alternative fuel sources, the number using oil continue to rise.

There is the possibility natural gas could grow as part of the fuel market, but that has been very slow in taking off, and it will be years before it's a meaningful percentage of the fuel market, if it ever becomes one. Infrastructure will have to be built out for that to happen, and even when there have been options to consumers, demand has disappointed in some locations such as Canada, which has closed some of its natural gas fueling stations.

For that reason, even though there may be more and better electric cars and hybrids, it's going to take a long time for that to take hold in developed countries in particular. By that time demand for oil will continue to rise.

Yet even if there was a drop in oil demand for cars and trucks over the next couple of decades, it would do little to alleviate the growing demand for oil from other segments of the market.

The IEA said this in its annual World Energy Outlook:

"The difficulty of finding alternatives to oil in road freight, aviation and petrochemicals means that, up to 2040, the growth in these three sectors alone is greater than the growth in global oil demand."

No matter how the narrative is attempted to be spun, demand for oil will continue to climb. It's only a matter of by how much, not if.

I see the pace of oil demand, at least over the next several years, being affected by market forces, meaning the decline in demand from the slowing global economy and inevitable recession, rather than a treaty without any enforcement teeth to it. That's what investors need to look at.

Conclusion

Unfortunately, oil has become politicized, and that means the official line from various sources will be that oil demand will peak in a relatively short period of time. Even 2040 isn't that far away. I don't believe in any way oil demand will even peak by then.

Emerging markets will continue to grow, and new markets will start to create new demand for oil and oil products. Some may think in developing nations something similar to what happened with phones will happen with demand for oil. By that I mean some countries without the infrastructure in place bypassed that step and went straight to mobile phones at the time. This isn't how it'll play out with oil.

An example of that is India, which had very low cost electric cars introduced, and yet it's set to become the market leader for oil demand. That demand obviously goes beyond cars, but it reinforces my thesis that demand for oil isn't close to peaking because of alternative fuel.

The bottom line is market forces will dictate oil demand, and that means it will continue to grow for decades. It makes a nice feel-good story to hear about the Paris treaty being put in force, but it will have no impact whatsoever on oil demand because of low funding and no enforcement arm.

When looking at peak oil demand, the reality is we have no idea when that will happen, and there still are trillions of barrels of oil around the world that in some cases, have yet to be figured out how to drill at a profit.

If supply struggles to meet demand, we'll start to see those known oil deposits start to be worked. That's especially true when we realize it'll take a lot longer than believed for alternatives to oil products to replace what is in high demand today, and long into the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.