Peak Oil Demand

By Julian Murdoch

Between recent consumption data and the International Energy Agency's World Energy Outlook 2009 report released last month, it's time for some serious questions when it comes to oil demand. Perhaps the biggest is this: Will oil fields be ready to meet existing and future demand, or will low investment in capital projects now cause bigger problems later down the line?

The big news on Monday was that U.S. oil demand keeps falling, according to the EIA, who said that U.S. oil demand in September was 2.74 percent lower than previously thought. September consumption came in at 18.362 million barrels per day—not a good sign for oil bulls who have been looking for any sign of strengthening U.S. oil demand to support higher prices.

Furthermore, yesterday's This Week In Petroleum report (covered extensively by Brad Zigler ) showed that once again, crude oil inventories rose. We now have over 24 days' worth of supply—a full 2 and a half days more than we had this time a year ago.

These numbers jive with the latest World Energy Outlook 2009 report (WEO '09), in which the IEA forecasts 2009's global energy use to actually fall for the first time since 1981. I can't say that forecast surprised anyone: From the oil company bigwigs to the minivan-driving soccer moms, many have predicted a drop in energy consumption due to the economic crisis. In fact, a recent survey by accounting and consulting firm BDO showed that oil executives aren't expecting energy demand to rebound until at least 2011.

What was surprising, however, was the WEO '09 long-term perspective on oil demand.

The Incredible Shrinking OECD Oil Demand

Between now and 2030, says the IEA, global oil demand will grow just 1 percent per year, with demand reaching 105 million barrels per day (mb/d) in 2030, or a 24 percent increase from 2008's demand of 85 mb/d. The IEA has been singing this tune for awhile; as The Oil Drum noted, the IEA has consistently dropped its 2030 demand numbers ever since its 2004 forecast of 121 mb/d. That 16 mb/d difference is a rather huge change of heart over the global financial crisis.

But what's most interesting is the specificity underpinning the demand numbers. Although demand is still forecast to increase, the real shocker here is the IEA's prediction that oil demand will actually drop for the next 20 years in OECD countries. Instead, the demand growth will come primarily from China, India and the Middle East:

Source: World Energy Outlook 2009 report

Given that China and India are two of the fastest-growing economies in the world, growth there seems logical, but what's strange is the relatively large decrease in oil demand in the U.S., Canada and other OECD countries. Why the sudden decrease? Is it due to a sudden rash of widespread conservationism? Continued economic weakness? Or is it just that OECD countries tend to have slow, steady population rates, and their economies are at such a point that demand will remain relatively stable from here on out?

Regardless of the specific reason, the economic implications of this base scenario are somewhat staggering. If oil consumption is a sign of economic activity, then the implication here is that the U.S. is heading into an energy recession of epic proportions. I find it somewhat difficult to stomach that the U.S. is essentially done expanding until I'm in retirement.

More Non-conventional Production In The Future

That said, global oil demand will keep growing in the future, and that means oil must continue to be produced at higher numbers to meet the need. The IEA's report forecasts that non-OPEC conventional oil production will peak next year, so therefore any increase in output would need to come from the OPEC countries that hold the bulk of remaining recoverable conventional oil resources. (Deep-water offshore rigs and oil sands are considered nonconventional oil production sites.)

But the known conventional fields aren't going to be enough, especially given the field depletion rates IEA released back in their 2008 World Energy Outlook.

A quick primer on field decline: When an oil field begins to produce less than it once did, it is classified as "post-peak." At this point, it becomes necessary to make capital investments to increase output, and recent technological advances have helped oil fields remain good producers even as their outputs decline. In last year's WEO, the IEA reported the average production-weighted decline rate in post-peak oil fields worldwide was 6.7 percent—a good third less than the natural decline rate (that is, the rate without ongoing investment). In other words, post-peak oil fields would have declined a third faster, had no capital spending been done after these fields past their peak output levels.

In 2008, the IEA projected that the natural decline would rise to over 10 percent per year by 2030, as the average field size drops and more production moves offshore (both are areas with higher decline rates). What this means is that increasingly more capital will need to be spent just to offset falling production in existing producing fields.

Add that to the IEA's prediction that, according to this year's report, almost half of the oil needed by 2030 will need to come from oil fields yet to be developed or found—that big scary blue part of the 2030 bar below—and you'd think OPEC investment in capital expenditures and exploration would be frantic:

Oil Production in the Reference Scenario, WEO '09

Source: World Energy Outlook 2009 report

But investment in oil exploration and capital spending is actually down. As WEO '09 states, "Energy companies are drilling fewer oil and gas wells, and cutting back spending on refineries, pipelines and power stations. Many ongoing projects have been slowed and a number of planned projects have been postponed or cancelled."

If spending remains depressed, fewer new oil fields will come online; and currently active ones could see their rates of decline increase, all leading to constrained supply at a time when demand will most likely be recovering.

Personally, I think all of this seems bullish for oil. Yes, inventories are super-fat, but given higher global demand, larger production costs, and a constrained and unknown supply, I smell higher prices ahead.

So this seems like an opportunity to look at oil services companies that will be best positioned to benefit when capital spending and exploration projects get the green light. Or if you believe credit for capital projects will remain tight, you might want to stick to the oil majors. Either way, relevant ETFs include the Energy SPDR (NYSEArca: XLE), which is up 60 percent this year already, the venerable Oil Services HOLDRs (NYSEArca: OIH) and more off-the-beaten-path funds like the PowerShares Dynamic Oil & Gas (NYSEArca: PXJ).

Comments

[sethmcs]

Don't forget that coal can be made into gasoline. Hitler ran his war machine on coal. USA has 25% of the world's proven reserves of coal.

[American in Paris]

Oilfinder,

You don't provide any arguments. If you are in the oil industry, then are certainaly aware the OPEC oil reserves are exaggerated and the Majors have lied about their reserves as well.

The truth is that there will be an oil supply crisis.

Last year guys like you were telling us that oil prices were high solely due to speculation.

Wrong.

Despite a very weak world economy, oil prices are at levels today that were historic highs only a few years ago.

Take off the blinders and do the math.

Oil price will be over $100 a barrel within two years.

On Dec 03 05:53 PM OilFinder wrote:

> I'm sorry to disagree longoil, but there is no way in God's Green
> Earth oil consumption in China is EVER going to approach 60 million
> barrels/day, let alone in just 11 years. Not even close. Nor is India
> remotely going to get to 20 million bpd. You are assuming the Chinese
> will reach the same standard of living we enjoy in the US, but that
> is never going to happen. They don't have enough room for endless
> cul-de-sacs filled with single family houses. If they're lucky they'll
> approach a Japanese or Korean standard of living. Same with India,
> but even moreso. India would be lucky to get to the level of Korea
> by then, but they probably won't even get close to that. Additionally,
> there is a big push in India to switch to natural gas-powered vehicles,
> which will temper future oil demand increases.
>
> Your catastrophic Saudi output decline will not occur either. I guarantee
> that, too. Finally, US oil consumption is now closer to 17 million
> barrels/day.
>
> I don't know what numbers you are looking at to draw your conclusions,
> but I can tell you you are looking at some fantastically wrong ones.
>
>
> On Dec 03 04:33 PM longoil wrote:

[William Davison]

NG will not cause oil prices to fall, because most oil is used for transport and the investment required to replace this infrastructure will take decades to replace and cost Trillions. Gas to liquids projects like Shell's Pearl gas-to-liquids plant in Qatar cost between $18bn and $19bn and how much will it produce? Just 250,000 GTL and BOE a day, less than half the production decline of Cantarell in 2008. Like it or not Oil at $80 is still fairly cheap.

[bluebare]

IEO

[hungry4food]

Key oil figures were distorted by US pressure, says whistleblower
Exclusive: Watchdog's estimates of reserves inflated says top official

www.guardian.co.uk/env...

[Ferdinand E. Banks]

Thanks for pointing out that the IEA forecast in 2004 (?) was 121 mb/d, and the same was true for the EIA. I discussed this in detail in my course on oil and gas economics in Bangkok in 2007, and assured my students that even the most ignorant researchers in the world probably wouldn't have made that kind of mistake. Why was I so certain? It was because - using linear approximations - that forecast would have meant production of at least 20 mb/d by Saudi Arabia, and THAT WILL NEVER TAKE PLACE.

[The Dark Years]

Your thoughts are right on about adaptation, but your time line may be flawed. An otherwise insightful comment that is appreciated.

As long as a product like oil (vs. NG, Wind, Solar, Geothermal, etc.) retains the most favorable ratio of energy provided to energy invested it will be the world's choice. The move away from oil dependence will be painful and cause great suffering. It will be a long time coming, much to my regret.

On Dec 04 12:04 PM jerrydd wrote:

>
> The IEA 2030 est are pipe dreams. Conventional Oil plus NGL which
> I consider oil will never get above 86mmbbls/day again. Why is basic
> geology, physics and economics. The investment to even keep that
> rate up is not being made.
>
> In the US oil hasn't been an indicator of growth for 3 decades as
> we now put out double the GNP/gal in constant $.
>
> Facts are we are getting far more eff and will over the next decade,
> drop our energy needs/GNP by 50% again.
>
> From transport to buildings our energy needs are dropping with no
> loss in living standards, in fact it is making them better.
>
> NG and many other forms of energy are replacing oil as well as eff.
> As fossil energy rises in costs, the other forms are dropping like
> RE is 50% of what it once was. And as RE increases into rewall mass
> production, it will drop like a rock. I'm now buying retail PV panels
> at just $2k/kw and wind has dropped to $1.5k/kw including inverter
> plus tower and install.
>
> Nissan is about to start selling next yr a 5 seat EV for the same
> cost as an ICE as will Ford. These go 3x's as far on the same energy.
> My personal EV gets far better than that, costing under 25% of an
> ICE's running cost including fuel and battery.
>
> There is no reason most homes, buildings will need outside power
> for the same cost as present buildings before now . And no reason
> the home, building can't even power the car, transport.
>
> There is no shortage of energy, just the equipment to catch, make
> or use it eff. The only reason it's not already wide spread is the
> subsidies on fossil fuels. If their real, full price was in them
> instead of in our income taxes, health costs, etc, they would be
> here now.
>
> Back to oil. It will go up to $150bbl early 2011, cause another recession,
> drop back down, go up again higher, drop, etc until we stop importing
> oil. But in about 6-8 yrs, the tables will turn, oil price flattening
> out at about $10.gal as it is replaced with RE, NG. So don't go too
> long on oil!!

[perceptions_now]

"Between now and 2030, says the IEA, global oil demand will grow just 1 percent per year, with demand reaching 105 million barrels per day (mb/d) in 2030, or a 24 percent increase from 2008's demand of 85 mb/d."

The world is full of games, within games and I don't mean computer games, I mean Political & Establisment games!

The Politicians & Establishment, particularly the Fossil Fuel industry, are trying with everything in their sphere of influence to balance the transition from the "old economy", to the new economy.

However, there are a few problems -
There is no way that Oil Production will be anywhere near 100 mbd at 2030, in fact in will be extraordinary if it is still at or above 80 mbd! In fact, Production may well struggle to be at or over 70 mbd, by 2030, but . The primary reason for that statement is that Crude Oil Production has already effectively Peaked, but there are few problems that will be inherent, due to that statement!
Demand is also likely to fall significantly

Two major Economic Drivers will combine to ensure that Demand will also fall significantly.
1) The Global Population is Aging rapidly and has been for some time, in most Countries that are major Economic powers, except India, due to the Baby Boomer Generation and the Economic effects of that process will contribute to a major Economic Decline.
ezinearticles.com/?The...

2) The rate Global Population Growth, which has been THE MAJOR DRIVER of Economic Growth, has been falling for some time and around 2030, Population Growth is likely to actually turn negative, in other words the TOTAL Global POPULATION will actually start to decline!

There are certainly other factors that will influence events, but the above are likely to overwhelm the games, the Politicians and the establishment, including the Fossil Fuels industry!

[Madcow2]

Eventually, someone will figure out how to economically harvest tar sands, shales, hydrates, and the deep tar currently unavailable to the oil companies.

Once that technology arrives, oil comes crashing down - and the price will be set by the technology's break even price -

[bob adamson]

Thank you for this article Julian Murdoch. For contrast, see a recent article in the Globe & Mail newspaper at the following link.

www.theglobeandmail.co.../

[blu]

jerrydd,
You are right about one thing..The world will not see 86 million barrels per day of oil and NGL's again.

That leaves only one route... much higher oil and gas prices.
You are a much smarter individual than most on this planet if you can stipulate with specificity the dates and times of prices to come.

As for me, I will just say that higher and higher prices are a certainty.
Don't know exactly when, or exactly how high, but it will be nice for those of us who have established a production base over the years.
I'm looking forward to it and grinning... (after some really hard years in the past.)

[jerrydd]

The IEA 2030 est are pipe dreams. Conventional Oil plus NGL which I consider oil will never get above 86mmbbls/day again. Why is basic geology, physics and economics. The investment to even keep that rate up is not being made.

In the US oil hasn't been an indicator of growth for 3 decades as we now put out double the GNP/gal in constant $.

Facts are we are getting far more eff and will over the next decade, drop our energy needs/GNP by 50% again.

From transport to buildings our energy needs are dropping with no loss in living standards, in fact it is making them better.

NG and many other forms of energy are replacing oil as well as eff. As fossil energy rises in costs, the other forms are dropping like RE is 50% of what it once was. And as RE increases into rewall mass production, it will drop like a rock. I'm now buying retail PV panels at just $2k/kw and wind has dropped to $1.5k/kw including inverter plus tower and install.

Nissan is about to start selling next yr a 5 seat EV for the same cost as an ICE as will Ford. These go 3x's as far on the same energy. My personal EV gets far better than that, costing under 25% of an ICE's running cost including fuel and battery.

There is no reason most homes, buildings will need outside power for the same cost as present buildings before now . And no reason the home, building can't even power the car, transport.

There is no shortage of energy, just the equipment to catch, make or use it eff. The only reason it's not already wide spread is the subsidies on fossil fuels. If their real, full price was in them instead of in our income taxes, health costs, etc, they would be here now.

Back to oil. It will go up to $150bbl early 2011, cause another recession, drop back down, go up again higher, drop, etc until we stop importing oil. But in about 6-8 yrs, the tables will turn, oil price flattening out at about $10.gal as it is replaced with RE, NG. So don't go too long on oil!!

[The Greatest Rip Off of our Time]

We can all blame Phil Graham with the Commodity Futures Modernization Act passed in 2001. That 262-page bill led to the Enron mess, the sub-prime lending disaster, and opened the door to the “Dark Energy” speculation trading.
For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...

Also read more about it at this site:
losangeles.injuryboard...

Also read more about it at this site:
losangeles.injuryboard...
Shortly before departing for the August recess, the Senate confirmed Walter Lukken and Sharon Brown-Hruska as CFTC Commissioners. Lukken was an aide to Senator Richard Lugar (R-Ind.) on the Senate Agriculture Committee and helped draft the Commodity Futures Modernization Act of 2000. Brown-Hruska, an economist, worked in the CFTC’s division of economic analysis when Wendy Gramm was the agency’s chairwoman. Brown-Hruska currently teaches finance at George Mason University.
And there in lay the reason for the global economic free fall.

[The Greatest Rip Off of our Time]

The oil industry is a balance game, they have what the world wants and needs and they know it. Obviously their target price is around $80 a barrel and they are willing to risk the whole worlds economy to try and keep it there. The world was pushed to the brink of economic collapse in the summer of 08 and will take years to recover from it. Make no mistake, it is not about demand and supply anymore, it is about control of the supple to control the price. The price of fuel affects every aspect of every person’s life all over the world. The cost of everything is relevant to the price of fuel. It is a monopoly of a product such as the world has never seen before. Your food cost, electric bill, water bill, heating bill, vehicle cost, every single thing you have to deal with is affected by the price of a gallon of fuel. I would urge every American to write, call, email and fax your representative today about your concerns on this matter ASAP.
This is a great article on this subject:
seekingalpha.com/artic...

[G. L. Turner]

Long Oil: China and India are growing, but their type of growth is not the same as that of the US' historical pattern...They will not be up to 20/mbd in 5 years...maybe by around 2020.

And to the author - yes we have peaked on energy/growuth in the US - what you are actually seeing is the downhill slope of our already shrunken manufacturing base....a service/IT economy does not consume the same amount of oil as a previously growing, manufacturing based economy that we were use to. In spite of population growth, we are becoming a less intense transport fuel based oil consuming nation...

[Al Fin]

Remember the effect of birth rates on economic growth. If a population is decreasing from low birth rates -- like Canada, most of Europe, Japan, Russia -- you will eventually see much less economic growth, and less demand for energy.

Even China's population is beginning to gray, as the one-child effect (and aborting of girl fetuses) makes its way through the population. China's fast growth has been based upon an export model, but that has led to overcapacity and an economic bubble. Projections for the future of China's energy demands need to take all of that into account.

Most of the population growth of the world is in dirt-poor countries of Africa and South Asia, where poverty and often disease keeps a lid on energy demand.

There is one other critical factor that no one is mentioning, so I will not mention it either. Nevertheless, that one unmentioned factor will keep third world energy demand well within conservative predictions.

[E.D. Hart]

Conservatively, we need to replace the 85 mmbls daily oil used, plus account for a 7% field decline, and a conservative 1% increase in demand. Increasing demand and decreasing supply without massive spending (and we aren't seeing massive spending) equals rising prices.
I like the ETF XES for a play on oil services as a cheaper alternative to OIH.

[E.D. Hart]

Unless you analyze the oil market from a geological point of view, then its not nonsense. Geology determines price as much as economics, and certainly determines peak flow rates (in relationship with technology of course--but you cant get oil from a turnip, so to speak, pardon the mixed metaphor.)

On Dec 03 05:37 PM Saildog wrote:

> This idea of "Peak Demand" is nonsense. Supply clears demand as determined
> by price. If supply is inelastic (as it is - increased production
> beyond todays capacity is not possible because of geology, politics,
> infrastructure etc) demand and price will always reach a balance
> based on the available supply. Note that production is a flow
> measured in barrels per day - reserves are irrelevant. Oil has
> effectively become the limiting factor on economic growth, mitigated
> only to the extent we can use it more efficiently. Efficiency will
> no doubt consist of substitution with gas and other energy sources
> as well as technologies and living arrangements that reduce usage.
> However other energy types are not as energy dense or convenient
> (liquid over a wide temperature range). Natural gas will not power
> aircraft for instance. Scale and timing are all important. Solutions
> that take 30 years to implement are not solutions.
>
> The first and second laws of thermodynamics, absolutely essential
> in understanding economics (but not - even by most economists), are
> coming into play. They cannot be circumvented, broken or ignored
> and they will determine our future.
>
> We need to begin to think about a future not dominated by economic
> growth based on ever increasing natural resource consumption and
> destruction. The resources are simply not there. This means dramatically
> altering our entire frame of reference, including limits to population
> growth.

[sethmcs]

I know I reached personal peak demand for oil. Using much less. How about you? The problem is NOT oil supply its who is controlling it. Maybe enough political pressure might cause some reform in how many oil contracts speculators can own.

[Civilization Type 1]

I'm sorry to disagree longoil, but there is no way in God's Green Earth oil consumption in China is EVER going to approach 60 million barrels/day, let alone in just 11 years. Not even close. Nor is India remotely going to get to 20 million bpd. You are assuming the Chinese will reach the same standard of living we enjoy in the US, but that is never going to happen. They don't have enough room for endless cul-de-sacs filled with single family houses. If they're lucky they'll approach a Japanese or Korean standard of living. Same with India, but even moreso. India would be lucky to get to the level of Korea by then, but they probably won't even get close to that. Additionally, there is a big push in India to switch to natural gas-powered vehicles, which will temper future oil demand increases.

Your catastrophic Saudi output decline will not occur either. I guarantee that, too. Finally, US oil consumption is now closer to 17 million barrels/day.

I don't know what numbers you are looking at to draw your conclusions, but I can tell you you are looking at some fantastically wrong ones.

On Dec 03 04:33 PM longoil wrote:

> If they approach the oil demand of the United States (300 million
> people consuming 20 million barrel/day), we will see a serious deficit
> by 2015. By then China 1 billion people could be consuming 60 mbl/day
> and India's 1 billion people could be consuming 20 mbl/day
.