Why Global Oil Demand Could Soon Peak

Citigroup (NYSE: C  ) stoked a major debate when it argued earlier this year that America would become energy independent by 2020. Now the bank is out with another bold new call. In a research paper titled "Global Oil Demand Growth -- The End Is Nigh," Citigroup argues that global oil demand is "approaching a tipping point."

The bank suggests there are two factors underpinning this expected trend. Let's take a closer look at both of them, as well as the shocking conclusion Citi draws about the future of oil prices.

Shift toward natural gas
The first factor is a transition away from oil and toward natural gas as a fuel source. The shale gas revolution has already provided American consumers and companies with cheap and abundant supplies of the clean-burning fuel. It has even ushered in a so-called "renaissance" for domestic manufacturers, including chemical manufacturer Dow Chemical (NYSE: DOW  ) and steelmaker Nucor, which have moved or are planning to move plants that were previously relocated abroad back to the United States.

In addition, several U.S. truck manufacturers are capitalizing on cheap natural gas by equipping new vehicles to run on nat gas instead of diesel. For instance, Navistar (NYSE: NAV  ) reckons that over the next two years, a third of all its new trucks will be powered by natural gas instead of diesel.

Natural gas engine manufacturers such as Cummins (NYSE: CMI  ) and Westport Innovations (NASDAQ: WPRT  ) will play a major role in driving this shift. In February, the two companies said their joint venture, Cummins Westport, is providing engines for two of the biggest natural gas transit fleet orders ever filled in North America.  

Both see massive potential in the North American long-haul trucking market, especially as companies such as Clean Energy Fuels (NASDAQ: CLNE  ) develop the natural gas refueling infrastructure necessary to support the transition toward gas-powered vehicles. Having already built dozens of new LNG truck fueling stations, Clean Energy plans on completing an additional 70 to 80 LNG fueling stations adjacent to long-haul trucking routes and key warehouse distribution centers across North America.

If the price of natural gas remains cheap compared with diesel, projects such as these should continue to flourish.

Improving fuel economy
The second major factor that points to a peak in global oil demand, according to Citigroup, is improving fuel efficiency among new vehicles. According to Citi's estimates, fuel efficiency among new cars and trucks is improving at an annual rate of 3%-4% and 1%-2%, respectively. Combining the two, the bank suggests new vehicles' fuel economy is improving by around 2.5% every year -- an estimate it deems conservative.  

Since the U.S. passed the Energy Independence and Security Act of 2007, which enforced higher Corporate Average Fuel Economy standards, vehicle fuel efficiency has improved drastically. The trend also appears to be catching on in other parts of the world, with the European Union, Japan, and Canada having passed similar mandates.

Though Citi acknowledges the slower pace of fuel economy improvements for the global fleet of light-duty vehicles, which was just 1.8% per year over the period 2008 to 2011, it expects more drastic improvements going forward. In the coming years, it forecasts annual LDV fuel economy improvements in the range of 3%-4%, as key emerging countries, especially China, place a greater emphasis on fuel economy.  

Citi's bold conclusion
Though it's hard to argue with the broad trends Citigroup highlights, you may be shocked by its conclusion that "by the end of the decade Brent prices are likely to hover within a range of $80-90/bbl." These projections are a sharp departure from mainstream views, which suggest that oil prices will continue to march higher over the remainder of this decade, led by rising demand from emerging economies and buoyed by the high marginal costs of production for unconventional oil.

In fact, the Organization for Economic Cooperation and Development recently said oil prices could rise to between $150 and $270 per barrel by the end of this decade, led by emerging-market growth.  

What do you think? Will emerging-market demand outweigh fuel efficiency and other improvements, driving oil prices higher? Or will the shift to alternative fuel sources drastically reduce the global economy's dependence on oil?

With the movement toward alternative energy gaining momentum, Clean Energy Fuels stands out as one of the biggest and potentially most lucrative opportunities. It's a first mover that's poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand-new report. Just click here to get started.


Read/Post Comments (17) | Recommend This Article (27)

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 07, 2013, at 1:11 PM, mikegtb wrote:

    there is NO "demand", the price of oil has nothing to do with the classic supply and demand, not ever since the hedge funds and big wallstreet players started treating the futures market as their own personal day trading cash cow. they are manipulating the market, they are taking advantage of a sound system and using it for greed while the rest of us falter and stumble our way to paying $4 a gallon. JP morgan and others have turned the futures market into a joke, and all it is doing is driving prices up across the board, they keep saying its demand...they ARE the ones creating the demand!!

  • Report this Comment On April 07, 2013, at 1:12 PM, mikegtb wrote:

    oh and look at that, ANOTHER fool article with "death to PC" at the bottom....ISHEEP GO BAHBAHBAH

  • Report this Comment On April 07, 2013, at 1:19 PM, luckyagain wrote:

    All predictions about the price of oil has almost always been wrong. No one has a crystal ball to see what is going to happen to the world's economy even next year. If the world economy improves then higher oil prices almost always happens. If the world economy sags, then oil prices will go down too.

    If I knew what the oil prices would be next month, I could make a fortune. No one really "knows" what oil prices are going to be.

  • Report this Comment On April 07, 2013, at 2:34 PM, pm1226 wrote:

    There is a big disconnect in this article that I cannot seem to reconcile. The title is "Global Oil Demand Could Soon Peak"...and yet the analysis seems to be very US centric. Now clearly - the US is a very important consumer of global crude and imports about 7.5-8 million barrels a day to meet demand , but in terms of growth - US consumption is falling relative to growing markets around the world like China for all the reasons outlined in this article. However, because this is happening in the US - does not mean it is happening in the rest of the world. Indeed - China is already poised to take over as the largest importer of oil (relative to the US)......and when the global economy picks up, BRIC nations, India, etc - will follow suit with thier global consumption. That is why the mainstream view continues to hold that oil will go up over time. A simple analysis drives home the point. There are 230 million or so car drivers in the US - as China, India, and other countries get to per capita income where everyone can afford a car - unless there is a massive revolution in car fuel in these other countries - oil will continue be the standard. My two cents.

  • Report this Comment On April 07, 2013, at 2:41 PM, haluko wrote:

    Fools,

    Has anyone read the Department of Energy Outlook 2013? The forecasts show the decline in oil demand by 2020. And, an increase in cleaner, renewable energy sources. This is not new news.

  • Report this Comment On April 07, 2013, at 2:49 PM, buzzltyr wrote:

    Increased storage has taken up supply but we are approaching 400 million barrels. Look at history and 400 million is the upper bond for a very long time period. We are full, they can not just keep putting it in okkie silos

  • Report this Comment On April 07, 2013, at 2:56 PM, Paulson545 wrote:

    We are nearing the point where the USA can no longer waste billions of taxpayer dollars on windmills and solar panels and will have to start building more coal gasification plants. America has a 150 year supply of coal so lets use it wisely.

  • Report this Comment On April 07, 2013, at 2:56 PM, RobertLudlum wrote:

    Isn't Citi the same financial powerhouse that the American taxpayer had to bail out a few years ago, and is now charging disadvantaged credit card holders 30% interest on money they get from the Fed for .01%?

  • Report this Comment On April 07, 2013, at 3:06 PM, motleyLiam wrote:

    The only people who consider windmills and solar panels "wasteful", are that of far right political views. Those folks are tight with Big Oil - of course they're going to dismiss new ideas. They want to keep everything the same as it ever was. And those Big Oil companies call themselves "Energy" companies - ha! If solar and wind items were adopted and then mass produced, they would be purchased by average consumers. But again, Big Oil does not want to explore that route, because there is more money to be made by claiming something is scarce (obviously wind and sunlight are abundant). Anyone who cannot see this FACT cannot see the forest thru the trees.

  • Report this Comment On April 07, 2013, at 3:29 PM, JoeMiddleclass wrote:

    Is this a paid for "news" story by Motley Fool to get clients? I have noticed that since the "NEW" yahoo home page has started there are dozens of these "news" stories from Motley Fool which end up promoting their financial advice. SHAME ON YOU YAHOO!!!!

  • Report this Comment On April 07, 2013, at 4:28 PM, philthymcnasty wrote:

    This is not surprising. As consumers began resenting the price at the pump they began looking for alternatives. This combined with a bad economy forcing people to look for ways to save money led to decreased fuel consumption and people buying more efficient cars. Combine this with the rhetoric coming out of the middle east and south America and you get an industry focusing on less fuel consumption. Its why fiat is advertising low gas consumption in their cars. this trend is permanent. Any car maker that wants to remain in business will have to focus of fuel economy from now on.

  • Report this Comment On April 07, 2013, at 6:36 PM, marcrauch wrote:

    As an earlier commenter wrote, the classical definition of 'supply & demand' is irrelevant when discussing the oil industry. It is a completely controlled market.

    In any event, in order for a shift to CNG to be really significant, we would need mass production of new CNG-powered passenger vehicles and easy inexpensive CNG conversions to existing vehicles. Neither of these is happening. Even Honda has now discontinued producing new CNG Civics, and they were the only carmaker building and selling new CNG vehicles in America. Additionally, the EPA has not rescinded any of their onerous CNG conversion rules and California has not changed their restrictions.

  • Report this Comment On April 07, 2013, at 6:56 PM, RobertLB1 wrote:

    If it was not for massive supply manipulation oil would be under $50 a barrel. All fossil fuels are obsolete, but greed, tax revenue, and profits keep us dependent on fossil fuel. Governments refuse to support technology that will ween us off from fossil fuels within 25 years, because they are clueless as to how to tax it this new technology.

  • Report this Comment On April 07, 2013, at 7:21 PM, Dutchman61 wrote:

    It is amazing just how ignorant the financial world is about what is really happening in the oil patch. They completely missed the shale gas revolution and right under their noses they don't get the oil revolution. Lefties can believe the fuel savings are the difference, but they are meaningless in the big picture.

    No matter how much the hedge funds wheel and deal, the reality is the basic price is set by the biggest whale producer. Currently that is Saudi. Saudi can produce a barrel of oil and deliver to the tanker for $12 to 14 per barrel. To ship it to China, the US or to Europe costs about $10 per barrel setting a cost at the dock in Houston of about $14 per barrel. In the past, the US had higher costs than this so the Saudis set the price. However, the shale oil is equal to Brent or Saudi Light in quality and it costs less than $22. The potential exists for produce upwards of 6 million barrels per day of shale oil once the pipelines are built. In addition, there is the potential for another 3-4 million barrels per day for off shore oil including nearly 2 million off Jersey alone. The cost is about $34 per barrel. Regardless of the little messiah's decision on the Keystone, Canada is well on the way to ramp up oil sands production to 8 million per day at a cost of $34 per barrel. They will also bring on another 3 million per day of oil shale production located north of the oil sands. This flood of oil will have to be absorbed first locally and then internationally. The real price point will be the cost to produce the oil sands. Anything above that a huge return for Canada. Citi is enslaved to the Obama agenda as this report indicates. Oil demand may peak, but costs will drop before that. Brent will drop to $65 per barrel by 2017 when Canada breaks the 5 million barrels per day mark.

  • Report this Comment On April 07, 2013, at 7:28 PM, norcalguy101 wrote:

    The manufacturers of locomotives in the United States are in the process of manufacturing natural gas-powered locomotives as well.

    If the United States converts the nation's passenger vehicles to natural gas there would be no need to import crude oil.

    The upside of natural gas is cleaner air quality in major metropolitan regions.

  • Report this Comment On April 07, 2013, at 9:46 PM, Charlie11Delta wrote:

    The demand will fall here, but rise exponentially in China/India. The crude will come here(the keystone XL extension) and go the to the Texas coast. It will be refined, then shipped elsewhere. We in this country will still pay through the nose for gas/diesel, while truck are retrofitted to CNG. So you're telling me nothing will change. High gas/diesel prices, high profits for the oil companies, and the American/European consumer will be left holding the bag. Excellent.

  • Report this Comment On April 08, 2013, at 8:16 AM, aolhater wrote:

    And we all sit back and think clean energy is NOT going to be the next Wall Street cash cow? XXXon/Mobil is now investing millions in Natural Gas, and it isnt so you and I can enjoy clean, cheap energy!

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