Source: Wood Mackenzie
Peak oil demand isn’t controversial anymore, just one of the planning variables oil companies are plugging into their models
“A lot of our [oil company] clients are paying very close attention to this peak oil demand story. They know it’s a question of when, not if, and their biggest focus is understanding the timing,” says Wood Mackenzie economist Ed Rawle, whose argues the apex will happen around 2036. Are Alberta companies ready?
A new study from the highly respected consultancy argues that a combination of higher fuel efficiency standards for gasoline-powered vehicles and the electrification of transportation, still in the very early stages, will begin to displace oil during the 2030s, though significantly higher demand from petrochemical manufacturing will somewhat offset any decline in consumption.
According to Wood Mackenzie’s new study, The rise and fall of black gold, oil demand “has already peaked across much of the developed world, starting with Japan in 2000.” Consumption in OECD (Organisation for Economic Co-operation and Development) countries is expected to fall by three million b/d by 2035, while in the non-OECD world it rises by 16 million b/d, with global leveling off at 109 million b/d, followed by a slow decline.
What’s driving the trend to use much less oil?
“Policy is important, but we think a lot of it is going to be driven by technological change and cost reductions from the use of machine learning, big data, and other digital technologies,” Rawle said in an interview.
The study suggests gasoline consumption will peak as early as 2030: “It’s a double whammy for gasoline: in the next decade, demand is hit by gains in vehicle fuel efficiency. Post-2025, it’s an EV story, as the ramp up in electric vehicle penetration displaces significant volumes of gasoline demand. The impact of peak gasoline on overall oil demand into transport is tempered by increasing demand for road freight and air travel.”
The biggest long-term technological change will be electric vehicles, both passenger cars and work vehicles, with as many as 280 million EVs in the global fleet by 2040. As an aside, this if half the forecast of other EV analysts, like Bloomberg New Energy Finance’s 559 million EVs by the same date.
“There is inertia in the global auto fleet because vehicles have a 10 to 15-year life. It takes time, even with the aggressive EV penetration rates we have in our forecast. It takes time for them to penetrate the fleet, which then drives oil demand changes,” said Rawle.
He expects the US, Europe, and China to lead EV adoption: “Compounding that inertia is the fact that in the developing world, which is driving a lot of the additional cars on the road, and many of those cars are going to be internal combustion engine because we don’t see the shift in the power grid and the electrification technology required to enable electrification of their vehicles. So, you have a lot of competing forces.”
Wood Mackenzie is not convinced that banning internal combustion engines – as countries like France, Germany, and China have mused about publicly – or providing subsidies for EVs will have a significant impact on adoption rates.
EV “subsidies are very much at the early stage to help accelerate sales, help change consumer behaviour. But there reaches a point where the subsidies have to pull away because they become a large financial burden,” he said.
“A number of these bans are not legislated and we don’t expect them to be in many parts of the world. They’re more targets, but they send a clear message to industry that governments intend to support the transformation in the transportation sector.”
As Rawle noted, oil companies are paying attention to the eventual erosion of their market.
“They want to know, where do we sit on the cost curve in that new world? Not only the peak, but the timing around the drop off beyond the peak,” he said. “And what is the shape of that peak? That’s really important and there’s a huge amount of uncertainty around that.”
Are Alberta oil producers doing their own calculations? Energi News readers can look forward to an investigative report on that topic in the near future, but the short answer is that oil sands companies, in particular, seem to be out in front of the curve.
“We do believe that oil demand will likely start to peak within 20-30 years at a level that is higher than today and although demand will decline thereafter, we expect oil will still be needed for decades,” Suncor CEO Steve Williams wrote in the company’s first climate report last year. ” However, we do test our business strategy under a scenario where policy and technology cause oil demand destruction sooner and still see Suncor continuing to deliver value to shareholders.”
Wood Mackenzie’s study is hardly unique. Every energy consultancy has taken a crack at forecasting peak oil demand.
What’s interesting is that the idea of peak demand isn’t controversial anymore, as it was a few years ago, it’s just one of the planning variables oil companies are plugging into their models.
Even in Alberta.
But that fact is not common knowledge among Albertans – even less so within Canada – and even many industry folks.
With a provincial election on the horizon, presumably May next year, Alberta needs to publicly discuss peak oil demand and the future of the oil sector.
What policies does the Alberta government already have in place (hint: quite a few)? Are cities like Calgary and Edmonton grappling with the issue (hint: you bet)? How will peak oil demand – and rapid technology change, musn’t forget technology – affect the high paying and plentiful jobs Albertans have become accusted to (hint: fewer jobs, more technical skills required)?
Peak oil demand, according to Ed Rawle and Wood Mackenzie, is likely to happen within the lifetime of most Albertans reading this column. Planning for change now and getting it right seems the smart choice.