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The Shocking Implications of the Rebuke of Peak Oil Theory

By Arjun Sreekumar - Apr 3, 2013 at 11:35AM

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Citigroup’s bold call for a decline in global oil demand and its implications for global energy.

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.

(C -3.39%)

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 (WM -2.65%) 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 (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 (CMI -2.64%) and Westport Innovations (WPRT -1.63%) 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 (CLNE -1.41%) 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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Stocks Mentioned

Waste Management, Inc. Stock Quote
Waste Management, Inc.
$153.06 (-2.65%) $-4.17
Navistar International Corporation Stock Quote
Navistar International Corporation
Citigroup Inc. Stock Quote
Citigroup Inc.
$49.32 (-3.39%) $-1.73
Cummins Inc. Stock Quote
Cummins Inc.
$202.71 (-2.64%) $-5.49
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$90.65 (-1.58%) $-1.46
Westport Fuel Systems Inc. Stock Quote
Westport Fuel Systems Inc.
$1.21 (-1.63%) $0.02
Clean Energy Fuels Corp. Stock Quote
Clean Energy Fuels Corp.
$4.89 (-1.41%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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