One of the biggest debates in the energy sphere right now is whether global oil demand is approaching a peak. Some commentators, like Citigroup (NYSE:C) commodities analysts led by Ed Morse, argue that the world's demand for oil is rapidly approaching a peak, while others, like Valero (NYSE:VLO) Chairman and CEO Bill Klesse, believe that global oil demand will continue to rise sharply. Which side has it right?
Citigroup: global oil demand nearing a peak
In a research paper released last year and titled "Global Oil Demand Growth -- The End Is Nigh," Citigroup analysts argued that global oil demand will peak much sooner than the markets anticipate, exerting downward pressure on oil prices by the end of this decade. They cited two main factors to support their conclusion -- the gradual transition toward natural gas as a fuel source and the improving fuel efficiency for newer vehicles.
Not only is natural gas cheap and abundant in North America, but it's also much better for the environment, spewing significantly fewer greenhouse gases than oil or coal. Recognizing the substantial cost and environmental benefits of using more natural gas, a host of U.S. companies are using more of the cleaner-burning fuel to power their trucks and hydraulic fracturing fleets.
Halliburton (NYSE:HAL), for instance, plans to add nearly 100 new light-duty CNG-powered trucks to its fleet, which the company expects will equate to roughly $5,100 in annual fuel cost savings per truck. Meanwhile, oil and gas producer Cabot Oil & Gas is using natural gas sourced from Pennsylvania's Marcellus to power its hydraulic fracturing operations in the region -- a move it expects could reduce its use of diesel by up to 70%, resulting in significant cost savings and reduced emissions.
Even auto manufacturers are expanding their lineups of dual-fuel vehicles that can run on both gasoline and compressed natural gas. Ford (NYSE:F), for instance, is working with Westport Innovations (NASDAQ:WPRT) to equip certain F-series pickups with Westport's WiNG dual-fuel system, which it hopes will offer customers a more seamless integration experience.
As for fuel efficiency standards, Citi estimates that the fuel economy for new vehicles is improving at an annual rate of at least 2.5%, driven by regulatory changes mandating higher fuel economy standards in the U.S. and other developed countries. As developing countries like China follow the developed world's lead in enforcing higher standards, Citi reckons that fuel economy for new light-duty vehicles should grow by 3%-4% annually over the next several years, placing downward pressure on global oil demand.
But according to Valero CEO Bill Klesse, who plans to step down as CEO of Valero in May, global oil demand will continue to grow at a strong pace for a long time.
Speaking at the recent IHS CERAWeek energy conference in Houston, Klesse estimates that global oil demand could grow by around 15%-20% by 2025, led by rapid demand growth in emerging markets in Asia, the Middle East, South America, and Africa that should easily offset shrinking demand from the developed world, which likely peaked in 2005 at around 50 million barrels per day.
Further, the resurgence of oil and gas production in North America thanks to rapid strides in shale drilling and the paucity of commercially viable renewable energy options means that fossil fuels will remain the single largest source of supply to fulfill global energy needs for a long, long time, Klesse added.
While both sides make convincing arguments and it's really difficult to make accurate forecasts about future oil demand, I think Klesse is right that fossil fuel demand won't peak for a long, long time. However, I also agree with Citigroup that natural gas will play a much larger role in meeting the world's energy needs in the future and will continue to take market share away from oil.
Still, it's unclear whether the transition toward natural gas and continued improvement in fuel economy standards will be enough to offset rapidly growing oil demand from China, India, and other emerging markets. As these countries' economies expand and their citizens get richer, they will demand more cars and use more fuel.
What do you think? Is global oil demand rapidly approaching a peak? Or will population growth in emerging markets ensure strong growth in global oil demand for a decade or longer?