Uncharted Territory: A Modern Peak Oil Theory

Peak oil theories have been around for decades. Marion King Hubbert accurately predicted a peak in U.S. oil production in 1956, in the first widely published peak oil theory. Since then, people have been predicting when demand would exceed supply and the dire economic consequences that will come along with it.  

But what if the peak oil theory is completely wrong? What if scarcity of oil never becomes a problem and the eventual decline in oil usage is due to falling demand, not shrinking supplies?

There's growing evidence that global oil supply is fairly abundant and consumers are using less oil. I'll outline why I think oil demand will peak by 2020 and why, eventually, alternative energy forms will bring the ultimate downfall for black gold.

Fuel efficiency becomes sexy
Over the past decade, a strange thing has taken place. Oil demand has declined in developed nations, almost across the board. U.S. demand peaked in 2005, Japan in 2003, and Germany way back in 1998. For Europe as a whole, the peak was in 2006.

The global recession drove some of the decline in oil demand, but demand was falling before the recession and continues to fall even as the economy recovers. The drivers of this declining demand show why a fundamental shift in the energy sector is beginning to take place.

In the U.S., one factor is that we're driving less, as fellow Fool Morgan Housel recently pointed out. He notes that more people live in urban locations or work from home and that demographic shifts have been part of the decline.

More efficient vehicles are another major factor in declining oil demand today, and this trend is picking up steam. U.S. drivers have shifted demand from gas-guzzling SUVs to more fuel-efficient cars. Hybrid sales have also increased, even in the SUV market. Over the next decade, automakers will be fighting to reach the new 54.5-mile-per-gallon fuel economy the Obama administration set last year, a target that will continue the drive to reduce oil consumption and may even push alternative vehicles because of the offsets they supply. For example, Tesla Motors (NASDAQ: TSLA  ) will be able to sell excess fuel-efficiency credits to other automakers that don't meet fuel-efficiency standards. Honda (NYSE: HMC  ) will also get incentives for making natural gas vehicles, effectively making these alternatives less expensive.  

Since the U.S. is the largest auto market in the world, we can assume that efficient and alternative-fuel vehicles will make their way to other developed countries as our technology and cost structure improves, continuing the downward trend in oil usage.

Environmental concerns will also play a role in the choices consumers make in coming decades. Climate change is a contributing factor to some consumers' behavior, and they're willing to pay more and maybe even drive a less convenient vehicle to do a part in reducing pollution.

Oil fueled growth
Of course, the developing world is a different story from that of the U.S. and Europe. Demand is growing in China, India, Brazil, and other smaller economies, and it's offsetting declines in demand elsewhere. You can see in the preceding chart how quickly these countries are growing their oil demand.

The good news is that overall growth is still slowing. India's oil demand grew 6.3% annually from 1995 to 2000 and just 4.5% over the past five years. China's growth has slowed from 6.9% to 6.3% over comparable time frames.

What's interesting about energy trends in the developed world is that it's aggressively building alternative energy technologies, which may turn the tides of oil use. China may be the world's No. 1 solar market this year and it is already one of the world's largest installers of wind. India is a rapidly growing solar market as well, targeting 20 GW by 2020. Solar and wind are by no means a replacement for oil, but they are an indication that these countries are focusing on alternative energies instead of relying solely on coal, oil, and natural gas.

In Saudi Arabia, 54 GW of planned renewable energy is, in fact, a direct replacement for oil-driven power plants. The major oil exporter is finding it cheaper to generate electricity from the sun than from oil, another sign that demand will see downward pressure long-term.  

The global picture
When we combine a drop in oil demand in the developed world with a rise in oil demand in the developing world, it has resulted in fairly constant demand over the past decade. In fact, from 2006 to last year, total liquid fuels consumption rose only 0.77% per year. That compares with compound growth of 1.7% from 1995 to 2006. Demand growth is definitely slowing.

As fuel efficiency rises, natural gas finds more uses, and alternatives such as electric vehicles and even solar take hold, the developed world will continue to see a slow decline in oil demand. The question is how fast the developing world will adopt new technologies. That's what will determine the direction of global oil demand over the next few decades.

A bold prediction
When we combine all of the data I've discussed, it leads me to believe that a peak in global oil demand is right around the corner, and it won't be because supply is running out. The peak may not come this year or next, but by 2020 I think we'll be using less oil each year. Cheap natural gas, environmental concerns, and new technologies will drive the reduction in oil usage in developed nations, and eventually those trends will spill into developing countries.

Oil is no longer the most cost-efficient energy, even in transportation, and new technologies will bring down the cost of other energy sources as well. These factors are what will drive the eventual decline in oil consumption, not the scarceness of the resource, as so many have predicted in the past.

One company driving the reduction in oil demand
Near-faultless execution has led Tesla Motors to the brink of success, but the road ahead remains a hard one. Despite progress, a looming question remains: Will Tesla be able to fend off its big-name competitors? The Motley Fool answers this question and more in our most in-depth Tesla research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

 


Read/Post Comments (12) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2013, at 1:18 PM, mikeflores2000 wrote:

    Dear Travis Hoium -

    "because supply is running out. The peak may not come this year or next, but by 2020 I think we'll be using less oil each year. "

    Have you done your homework before reporting a gross misrepresentation of the facts?

    Peak Oil is not running out of oil, it is the extraction rate of cheap oil. The world has plenty of oil!

    Using words like 'may not' and 'I think' don't present

    a credible story based on years of research.

    Prudent not to pay a subscription to be a

    Motley Fool.

  • Report this Comment On April 06, 2013, at 4:59 PM, nonStitZealot wrote:

    Travis ,

    I'm sure you are a very quick witted fella and very observant BUT your ignorance of basic economics is glaringly obvious .

    Economics is the study of the distribution of SCARCE resources . Commodities are the most well defined examples of that .

    The world is at peak oil SUPPLY and has been since 2005 . You need to learn what the term "inelastic supply" means .

    For more explanation see :

    http://www.fool.com/investing/general/2013/04/06/us-energy-b...

    and

    http://nonstitiouszealot.newsvine.com/_news/2012/02/25/10507...

    PS : Notice that there has been a minor increase in global supply between the above 2 articles . They only cover up to 2011 . By now there may be an even larger increase but it is unlikely to be much in quantity . And that is the point . CHEAP oil is not available . As a result there is no reason to expect a sustained decrease in the price of oil . The only exception would be an huge technological advance . Those are possible but they are still a long way off .

  • Report this Comment On April 06, 2013, at 5:05 PM, TheMonolith wrote:

    Peak oil has never been about geology alone, it has always been about geology and economics.

    The marginal price of a barrel of oil is now around $100, more than a lot of people can afford to pay. So they cut back and demand drops. Soon after that marginal barrel will not be produced.

    After that $100/bbl marginal barrel is not produced, price has to drop to the level that the last marginal barrel CAN be sold.

    Until all of the low cost oil is gone or demand-priced upwards out of range. Then it all stops. There is no one left who can afford the next barrel produced.

    There could be Billions of Barrels of Oil left somewhere - in oil sands, deep ocean plays, or as kerogen in Wyoming. Much of this oil will not ever be extracted, because you see, no one will be able to afford to pay the very price per barrel necessary for the extraction industries to break even, let alone make a profit worth the CAPEX and risk.

    Keep in mind that the energy required to extract, ship, process, and ship the processed oil product is increasing every year. As the number of barrel of oil equivalents necessary to extract each marginal barrel of oil approaches one...the jig is up...when that point is reached, there is no net energy benefit to extracting any more oil...the game of diminishing returns will have played out to its inevitable end. The same will occur with natural gas and coal.

    Scarcity of oil is a problem and has been for several years. Cheap oil is very scarce and only high priced oil can be added to the world supply and that is what is causing peak demand.

    The World's population is predicted to increase from ~ 7B now to ~ 9B by 2050...maybe higher...

    ...And a lot of people in industrializing/modernizing countries will continue to seek more energy-intensive economies and lifestyles.

    Many of these people will place a higher value on each marginal barrel of oil than we U.S. citizens will...and they will outbid us for some of this diminishing resource.

    Add to this the fact that oil-exporting countries are continually increasing their internal consumption of their own oil due to modernizing lifestyles...leaving a smaller percentage of their production to export every year.

    Cheap oil...and cheap energy in general, has underpinned World economic growth so far.

    What will replace the 'fossilized sunshine' concentrated over millions of years (oil, natural gas, coal) as their finite supply continues to be used up and their prices continue to rise?

    It is mind boggling that the Motley Fool is unable to grasp these simple economic realities.

    Best hopes for 'Mr. Fusion'

  • Report this Comment On April 06, 2013, at 5:48 PM, mbee1 wrote:

    The writer has some nice grafts buts make serious mistakes in his conslusion . the small rise in oil consumption is most likely due to the implosion in the economony rather than reduced fundamental demand. The next error is the assumption that oil use will fall in the near term from conservation. 5 billion people do not have cars, they want cars, they want the good life, that will drive up oil demand in total even if every car got 100 miles per gallon. the most serious error is that assumption we have a limited supply of oil in the ground. Nobody actually knows how much oil is in the ground. We do know that the USA alone has the worlds largest reserves of fossil fuels in coal, oil and natural gas combined. Throw in Canada and the west has hundreds of years of supply. If we have a lot than the rest of the world most likely has similiar supplies. Finnally pushing Tesla in a story seems both foolish and unprofessional. Tesla is a footnote in the car business and most likely will always be a footnote.

  • Report this Comment On April 06, 2013, at 9:05 PM, quasimodo007 wrote:

    it great Con game by the big Mafia Oil Corporations to keep Inflated oil prices high. In the USA has so much OIL yet it stills keeps importing OIl and exporting Oil. The GREAT American RIP OFF from the GOP Congress and their mafia stye Privilege Crooks of Wall Street. GREED and Corruption and Pollutions is their TRUE MOTTO.

  • Report this Comment On April 06, 2013, at 9:30 PM, Beery1 wrote:

    This 'peak demand' meme is nonsense. You can't have peak demand unless there's also peak supply, and that equals 'peak oil'. I know cornucopians don't like the term, but it's happening. Simply rebranding it won't work. Sometimes you just have to accept you're wrong.

  • Report this Comment On April 06, 2013, at 10:52 PM, iosax wrote:

    i think there is a basic confusion here: the scientific meaning of peak oil is, when will the discovery of new oil reserves start to decrease? the consensus is it already did, about 10 years ago

  • Report this Comment On April 06, 2013, at 11:02 PM, bugmenot wrote:

    The Nobel guy - Feyman - said that "Science was the belief in the ignorance of experts." The news media is a poorly educated profession - likely no science, no math, and certainly no statistics or data analysis. They have been hyping any scare mongering health or science related story for the last 20 years! We have politicians like Obama who declare "consensus" as science. Heck, Einstein's biggest problem was fighting the consensus of the time - pun intended as the theory of relativity was totally against the consensus position. We can't believe anything we read or hear in the news media anymore. Bias and incompetence rules.

  • Report this Comment On April 07, 2013, at 1:42 AM, TheMonolith wrote:

    "Since the U.S. is the largest auto market in the World..."

    From cnbc:

    1. China

    2011 sales forecast: 17.7 million

    2010 vehicles sold: 17.2 million

    Estimated growth: 3%

    China established itself as the world’s biggest car market in 2009 after vehicle sales jumped a whopping 46 percent over the previous year. Auto sales leaped another 32 percent in 2010, helping China extend its lead over the U.S.

    I was led to believe that The Motley Fool was a good website to find credible economic and financial information.

    After reading this post and seeing the blatant errors contained within...I can see that The M.F. isn't what I was led to believe...just another site full of hot air. :(

  • Report this Comment On April 07, 2013, at 4:46 PM, mikeflores2000 wrote:

    The verdict is in: Uncharted Territory: A Modern Peak Oil Theory is 'Yellow journalism'

    Time for facts ( sugar coating excluded )

    The End of Suburbia promo trailer

    http://www.youtube.com/watch?v=qHr8OzaloLM

    Peak Oil - Visually Explained

    http://www.youtube.com/watch?v=gHKp5vF_VoE

    German Army Peak Oil Study - within 10 years oil shortages may collapse global economy

    http://www.youtube.com/watch?NR=1&feature=fvwp&v=ZyU...

    There's No Tomorrow (Peak Oil) Documentary

    http://www.youtube.com/watch?v=IipwQryubIE

    A Post-Oil Man

    http://www.youtube.com/watch?v=QovBLFZhQME

    What is Peak Oil ?

    http://www.youtube.com/watch?v=roMxfQ-cdKE

    President Jimmy Carter - Address to the Nation on Energy

    http://millercenter.org/scripps/archive/speeches/detail/3398

    The bottom line is we are toast because it takes

    decades to swap out old infrastructure even if

    a new energy source was discovered today.

    We pissed away those decades dismissing

    Geologist M King Hubbert in 1956 and

    President Carter.

    Who do we blame?

    ( please sit down you won't like it )

    The generation who was of voting age in 1956 when

    first warned of Peak Oil and had decades to plan and research more efficient alternative energies.

    Sorry, solar efficiency at best is 48% at high cost.

  • Report this Comment On April 08, 2013, at 10:18 AM, OilDusk wrote:

    Yes, the author apparently completely misses the point that oil prices are around $100 a barrel and were around $30 a barrel just ten years ago. This seems like a clear case of demand inelasticity - the exact opposite of what this article suggests is going on.

    Affordable oil is definitely going away - despite the slight uptick in oil production in the US from shale oil production in recent years.

    Keep an eye on natural gas driven vehicles. Most oil driven vehicles can be converted at a relatively affordable cost and there are an estimated 22,000 TCF's of technically recoverable natural gas reserves in the world. It's not a permanent solution, but it's one that will buy the world another half a century of fossil fuel dominated energy.

  • Report this Comment On April 08, 2013, at 1:23 PM, ralfyman wrote:

    Peak oil is not a theory but a fact; that is, oil is a limited resource.

    It will take a long time for demand to drop because much of manufacturing and mechanized agriculture are heavily dependent on the use of oil, especially petrochemicals.

    About efficiency, in a global economy involving competition, efficiency does not lead to less resource use as unused resource is considered a cost.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2349545, ~/Articles/ArticleHandler.aspx, 9/20/2014 6:10:25 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement