For decades there have been predictions of peak oil and the disastrous consequences it will have on society. As the theory goes, eventually the world's oil reservoirs will run out of oil, driving us to more expensive reservoirs and higher oil prices until there's not enough cheap oil to serve the world's energy needs. Essentially, there will be a peak in cheap oil supply.
Those who fear peak oil also often think there will be a cascade of economic disasters as a result of this peak in cheap oil supply. Today, there is emerging evidence that a peak is on the horizon -- but it's not a peak in supply, it's a peak in demand. Energy efficiency is improving, alternatives are becoming viable, and oil just isn't as attractive as it once was to consumers. The result could be a peak oil scenario that works in exactly the opposite way of what's been predicted -- and a scenario that's good for everyone.
What the world's oil usage tells us about peak oil
Before discussing why I think peak oil demand is nearly upon us, it's important to put the current oil market into context. Global oil demand has grown consistently since the oil shortage in the 1980s, as you can see below.
What's notable about this chart is that both the U.S. and the European Union are no longer driving oil consumption growth. In fact, by 2005 both developed regions were reducing oil demand by a meaningful amount. Instead, growth is driven by emerging markets like China, India, and even the Middle East.
World Oil Consumption data by YCharts.
This is important because while the developed world is reducing oil usage, most of the world's emerging markets have an economic incentive to reduce consumption by either reducing oil imports (China and India) or increasing oil exports (Middle East). The result is that lower oil usage would be good for these countries, leading them to look at alternatives for their own energy needs.
Ford's C-Max Energi combines an electric drivetrain with solar cells to create a new breed of vehicle. Image source: SunPower.
Efficiency keeps people away from the pump
One of the most immediate ways oil demand is being pressured is by the improving efficiency in the world's vehicles. The U.S. has CAFE standards in place that require automakers to produce an average fuel efficiency of 54.5 miles per gallon by 2025, driving an efficiency push.
There's also a general push toward more fuel-efficient vehicles. Hybrids and electric vehicles made up 4% of the auto market last year and are seeing rapid growth amid gas prices stuck over $3 per gallon. Around the world, consumers, businesses, and governments are looking for ways to squeeze more out of each dollar spent on energy, and efficiency is the easiest way to do that.
Alternative energy begins to take hold
Efficiency is great in the developed world, but it's tough to convince a middle-class worker in China that a Prius is worth the price, and it's emerging markets that are driving the recent oil consumption growth. That's also why trends in alternative energys in emerging markets are so meaningful.
They may seem like strange bedfellows, but the Middle East and China are two of the most bullish regions when it comes to alternative energy -- particularly electric vehicles and solar energy. Solar energy isn't a direct replacement for oil in most of the world, but it will offset oil in places like the Middle East, where they burn oil for electricity. In places like China, solar energy is replacing other fossil fuels and encouraging the use of electric vehicles.
China recently increased its solar installation target for 2014 to 13 gigawatts -- enough to power 2.1 million homes -- and about a quarter of all solar installed this year. CleanTechnica recently predicted that China could install a total of 100 gigawatts of solar by 2018. This is in addition to moves like banning coal in Beijing by 2020, and predictions from electric-car maker BYD and others that a gasoline tax is on its way.
It's likely China will fall short of its goal of having 500,000 electric vehicles and hybrids on the road by 2015, but incentives for alternative-energy vehicles are improving and so are prices. The Chinese government has made a concerted effort to expand solar and electric vehicles, and it could help the country reduce reliance on foreign oil, which is one of their main goals at the end of the day.
The Middle East is trying to do the same thing as China, but for very different reasons. Oil is the main export for most Middle Eastern countries, and as you can see below, they've been increasing consumption, which could be exported to the rest of the world.
Middle East Oil Consumption data by YCharts.
That's why Saudi Arabia has plans to spend $109 billion to build 41 gigawatts of solar, which it hopes will supply the country with one-third of its power by 2032. Like other Middle Eastern nations like Qatar, Egypt, and even Iran, which are opening up the solar industry, there's an economic incentive to replace oil electricity production with solar.
Massive solar plants like SunPower's Solar Star are changing the energy discussion. Image source: SunPower.
Economics will drive the peak in oil demand
Fundamentally, the challenge for oil is that it's becoming more expensive than alternatives. Cheap oil from places like Texas and the Middle East drove our addiction to oil, and as those fields dry up it becomes more expensive to drill for oil in shale or offshore reserves.
Meanwhile, the cost of solar and wind energy comes down year after year, already surpassing grid parity in many parts of the world. The last piece of the puzzle is electric vehicles, which are already beginning to become a significant portion of auto sales. As their costs fall, it'll become more economical for consumers worldwide to choose to lower oil consumption because there are cheaper alternatives.
We've already seen a peak in oil demand in Europe and the U.S. I think before 2020 we'll see a peak in demand in places like China as well. When that happens, the world may see peak oil, but it'll be a peak in oil demand. That could be the best news we've had in energy in a long time.
