For nearly 50 years we have been familiar with the concept of “peak oil”. The phrase was coined by the Shell geoscientist M King Hubbert, who accurately predicted that the US would hit its highest levels of oil production by the early 1970s, and decline thereafter.
Predicting the precise point at which the global extraction of oil will reach the top of its bell-curve has proved more difficult, partly because the size of untapped reserves must be classed as a “known unknown”.
But now a remarkable study says a strong chance exists that the worldwide demand for oil will peak by 2020 – and that this will most likely occur before any constraints on supply begin to make themselves felt. This startling conclusion has been reached after careful examination of the most recent academic and professional thinking on population, technology and public policy trends. The study was led by Ricardo Strategic Consulting in collaboration with Kevin J Lindemer and with industry-wide participation.
A key component of our overall conclusion is the assessment that the future contribution to oil demand growth from China, the world’s fastest-expanding market, will be less substantial than is generally anticipated. This outcome will arise because of China’s drive to limit its dependency on imported energy – particularly oil – and owing to the impact of the country’s demographic time-bomb on its economic growth.
The fact is that China’s population of working age will begin to decline from 2016 onwards, thanks partly to the “one child” policy. The resultant shift in the balance between the productive and non-productive parts of the population seems certain to drag down the nation’s economic growth prospects.
And an ageing population tends to drive less. These factors underpin our conclusion that demand for oil in China could be on a declining trend by 2030.
Meanwhile, the imperatives that guide public policy worldwide will continue to work against demand for oil. The reasons vary by country. In China, security of energy supply is the main driver, with urban air quality another big concern. Supply security also preoccupies policy makers in the US, as does the issue of oil price volatility.
Environmental concerns seem to be foremost in the minds of legislators in Europe. But all these policy drivers have some significance in all regions. They are mutually reinforcing, and crucially – for the first time in my working life – they’re all aligned in the same direction.
Meanwhile, in most regions, pump prices for fuel are likely to remain high to support policy goals, even in the event of weakness in the underlying commodity price. This will choke off demand and promote the development of the vital technology that improves fuel efficiency.
In the short- to medium-term, the most important downward pressure on oil demand will derive from the dramatic increase in the fuel efficiency of conventional vehicle engines, not least in the US. Beyond 2020, market penetration of new forms of automotive technology, especially the electric vehicle in its various hybrid guises, will begin to have a more appreciable effect.
All our assumptions in the study are conservative. We judged the economic viability of second- and third-generation biofuels to be too uncertain to project, for example.
But we did conclude that first-generation biofuels could play an important part in further reducing fossil-fuel demand, without compromising food supplies – assuming that growth of crop yields can be maintained, and problems of underinvestment remedied.
Global energy demand will, of course, continue to rise, as will the demand for transport. The world’s vehicle fleet is expected to increase by 80% between 2010 and 2035. But oil’s role in meeting this transport demand will become steadily less significant, and its overall place in the energy mix will fall accordingly. So the threat of “peak oil” as previously foretold – the calamity of a world running out of oil – can be viewed with increasing equanimity.