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The Shocking Implications of the Rebuke of Peak Oil Theory

Peak oil theory has gained widespread recognition at various points over the past several decades, usually during times when fears about oil supply shortages have been at their highest.

The theory, which espouses the very commonsensical view that the world's crude oil resources are finite, essentially states that at some point in the future, oil production will begin to fall and prices will rise.

The last time peak oil theory regained widespread popularity was back in the early 2000s. But since then, fears of global supply shortages have all but disappeared, as America's shale oil and gas revolution has radically altered the paradigms of global energy.

And in what is perhaps a sign of the changing times, an entirely different version of peak oil theory has emerged. Unlike the traditional view, which looks at supply side concerns, this new version targets the other side of the equation and forecasts a peak in global oil demand.

Citigroup makes a bold call
In a new research paper entitled "Global Oil Demand Growth – The End Is Nigh," Citigroup's Seth Kleinman argues that the combination of two factors – a shift away from oil and toward natural gas, combined with improving fuel economy – suggests that global oil demand is "approaching a tipping point."

Kleinman's view is certainly not a commonly accepted one. Numerous oil market commentators, including widely respected oil and gas companies, have espoused different opinions. For instance, ExxonMobil, in its recently released "Energy Outlook to 2040," forecasts global oil demand to continue growing through 2040, albeit at a more modest pace than in previous decades.

Like Kleinman, the integrated oil major suggests that increased fuel efficiency and the substitution of other transport fuels for oil will lead to slowing global demand growth. But unlike Kleinman, Exxon predicts total oil demand, excluding biofuels, to climb above 105 million barrels per day by 2040.  

In contrast, Kleinman envisions a scenario where improving fuel efficiency and the transition toward natural gas lead to a flattening out of oil demand growth in coming years, with global consumption remaining under 92 million barrels per day over the second half of this decade. 

Exxon's view is definitely more in line with mainstream beliefs. But if Kleinman turns out to be right, it will have massive implications for both the global oil market and the global economy over the next couple of decades.

Can natural gas really compete with oil?
The trends of improving fuel efficiency and shifting toward natural gas as a transport fuel are unmistakable, though the future rate of progress on these two fronts is hotly contested.

Already, natural gas as a fuel source has made significant progress among trucking fleets. For instance, Waste Management (NYSE: WM  ) reckons that, over the next five years, some 80% of its new trucks will burn natural gas as opposed to diesel. Among natural gas truck manufacturers, a similar view prevails, with truckmaker Navistar (NYSE: NAV  ) projecting that, within a couple of years, a third of all trucks it sells will be powered by natural gas.  

The other necessary components of the equation – refueling stations and natural gas engine manufacturers – are also firing on all cylinders. Cummins (NYSE: CMI  ) and Westport Innovations (NASDAQ: WPRT  ) recently announced that they are joining forces to provide engines for two of the biggest natural gas transit fleet orders ever filled in North America.  

And Clean Energy Fuels (NASDAQ: CLNE  ) continues to lead the way in developing the refueling infrastructure needed to support natural gas vehicles. The T. Boone Pickens-backed company already has more than 300 natural gas refueling stations across the U.S., of which roughly 80% are equipped to refuel passenger cars and light-duty trucks running on compressed natural gas.  

Questions to consider 
It certainly appears that trucks and heavy-duty vehicles are making impressive progress in transitioning to natural gas. But I wonder if people are overestimating how quickly U.S. consumers will switch over to natural-gas-powered cars. Despite major incentives, such as high gasoline prices and dirt cheap natural gas prices over the past couple of years, adoption so far has been minimal.

Even if natural-gas-powered passenger vehicles make significant inroads over the next several years, will it be enough to offset rising oil demand from China, India, and other major emerging markets? I'm not sure.

At any rate, the pace of these developments hinges on a few unknowns. How quickly will gas-powered trucks, consumer vehicles, locomotives, and shipping vessels catch on? Where are natural gas prices headed and how will they affect the pace of adoption for these vehicles?

How long will the U.S. shale boom last? Have we underestimated decline rates for shale gas wells? What initiatives will governments take to support the development of more fuel-efficient vehicles and/or reduce subsidies provided to oil companies? And lastly, where are marginal crude oil production costs headed given the trajectory of global demand growth?

I don't have the answers to these questions, nor does anybody else.

But what I can tell you is that, over the long term, you're more likely to see better returns by investing in some of the above-mentioned companies – especially those that are first movers in their respective fields and are supported by disciplined yet visionary management teams – than you are by investing in a crystal ball.

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Read/Post Comments (6) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On April 03, 2013, at 12:40 PM, TMFMarlowe wrote:

    Good article on an issue that we Fools should be talking up -- or at least talking about -- more than we have.

    My two cents: I think natural-gas cars are likely to remain a pipe dream. Beyond the infrastructure and storage issues, it's just hard to make automotive engines that work well with NG's relatively low power density, and several paths of lesser resistance are already visible.

    I think the more realistic hope is for EVs that recharge via an infrastructure that moves more and more away from coal and toward NG. But I think the most realistic intermediate-term future (say 20 years out) is for ever-improving hybrid cars burning good ol' gasoline, albeit less and less of it.

    John Rosevear

  • Report this Comment On April 03, 2013, at 2:36 PM, spiritpen wrote:

    Yes it is true- peak oil was always a lie. The problem is not that we are running out of oil- the problem is the atmosphere can't take the burning of fossil fuels anymore. That includes natural gas, which is just another way to say OIL. Many of the same problems with oil are also associated with natural gas. Seismic testing, drilling, war, warming etc. Only a switch to solar power from home and business rooftop arrays charging electric cars, is a real answer. drivingthefuturedotcom

  • Report this Comment On April 03, 2013, at 2:49 PM, catboatbob wrote:

    Honda offers or offered a natural gas Civic on the westcoast that used a residential based fueling station called Phil. That type of system supplanted with natural gas commercial filling stations could raise interest and adoption among consumers much more quickly. Even without commercial filling stations I would seriously consider a vehicle if I knew I could tap into my homes existing natural gas supply and eliminate the so-called middle man.

  • Report this Comment On April 05, 2013, at 10:19 AM, platinumshore wrote:

    One big problem - most of the cheap affordable natural gas is coming from the expensive and energy intensive Shale oil as byproduct (not Shale gas directly as the rig counts have been falling for some time now, and not the increase necessary to offset the 40% a year well decline rates).. this in my mind is a setup for price instability ie a predator-prey model feedback between what is demanded (gas as cheaper) and what is been produced at a profit (oil). Peak oil lives on another day..

  • Report this Comment On April 05, 2013, at 7:12 PM, stumorr wrote:

    I have to admit that this article befuddles me somewhat. Oil is about ten times the price it was a decade or so ago. Production figures of conventional oil have been essentially flat since about 2006, so the obvious implication is that demand has outstripped supply. New sources of expensive oil are now being exploited, but they paradoxically can't drop the price lower than their production costs. So expensive oil is here to stay.

    My understanding of peak oil theory is that as oil becomes more difficult to produce, demand outstrips supply, raising the price, and that it eventually reaches a price where demand begins to fall as economies slow or the price is too high for previous uses of the product (asphalt roads come to mind).

    So "peak oil demand theory" is pretty much the same as "peak oil theory" -- production eventually peaks whether because costs of extraction drive down demand. Oil production could keep going up forever if cost of extraction wasn't a factor, but eventually we can't afford it, and production plateaus.

  • Report this Comment On April 05, 2013, at 8:23 PM, platinumshore wrote:

    re: stumorr

    Cost of extraction is one issue, energy returned to energy invested is another. If oil is extracted just for energy (it isn't, but lets assume that it was) usage, then there eventually comes a point where 1 btu barrels worth of oil energy will be used to obtain 1 btu barrels worth of oil / gas production.. below this point it is called an energy sink and no amount of price rises will change that relationship - this is something classic economics doesn't tell you, that on energy grounds production becomes increasingly inelastic to price as you move closer to a resource sink status. That is why peak oil is still alive and well, and the move to Shale oil/gas doesn't disprove peak oil, but actually re-enforces it (more energy intensive). Citigroup home goal.

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