Given the frequent episodes of peak oil hysteria in the past, one might anticipate its return as the subject of editorials and conferences before too long. Yet today’s trends suggest otherwise. For the next many years to come, global oil shortages will be far from the minds of governments, corporations, or individuals—the same groups whose behavior was once shaped by the fear of peak oil. Today, the possibility that the world will run out of oil seems so remote that no serious entity will use the notion of peak oil as a driver of its decisions.
At least one, and possibly two, waves of energy abundance will put a stake in the heart of peak oil. The first wave is the supply-induced abundance that has come about thanks to the technological advances and political decisions described in the previous chapter. The second wave involves a reduction in demand. Such a reduction remains speculative, but the mere fact that there is real potential for such a decline has begun to influence the thinking of key actors. If, however, demand growth or even absolute demand begins to taper off, the energy abundance the world is experiencing today will be reinforced. In this scenario, the reprieve from peak oil would be a permanent one.
The first, supply-induced energy abundance will be enduring, notwithstanding many headlines to the contrary. Americans in 2016 were inundated with reports on the plunging number of drill rigs deployed, the shuttering of small businesses that sprang up earlier to support shale producers from North Dakota to Texas, and a raft of bankruptcies of small oil and gas companies. Many declared the end of “the 21st century version of the American gold rush” and wrote obituaries for the tight oil boom.
Unquestionably, the low oil prices of 2014–2016 did temper the energy boom in North America. From 2011 to 2014, while oil prices hovered close to $100 a barrel, U.S. production grew like gangbusters, increasing, on average, by 1 mnb/d per annum. For a year following the price plunge, such production remained remarkably resilient. The combination of advancing technology, the slashing of costs, significant hedging, and plentiful credit enabled companies to continue to produce copious amounts of tight oil even with prices in the doldrums. But eventually, after U.S. crude oil production peaked at 9.6 mnb/d in April 2015, it began a slow decline, exposing the limits to the resilience of tight oil. A year later, instead of being up an additional million barrels—as likely would have been the case had oil prices stayed high—overall American oil production was down by almost that amount, nearly half due to contraction in the tight oil output.
Yet, the poignant stories of loss and financial ruin in this downturn obscured the big picture. Two important points about American tight oil production were easily lost. First, most companies and energy agencies anticipate a return to more hardy levels of U.S. oil production in the coming years, despite the dip of 2014–2016. Despite lower prices, in their main scenarios, both the U.S. EIA and the Paris-based IEA anticipate that overall U.S. oil production (crude plus natural gas liquids) will surpass its 1970 record by nearly a quarter by 2020.
Second, even in the less-likely scenario where oil prices returned to early 2016 lows of $30 and stayed there for the foreseeable future, overall American oil production will still be more robust than it was before the boom began. There are shale fields—such as the part of the Eagle Ford formation in DeWitt County, Texas—that will continue to be profitable even at that price. And the continuous advance of technology will make any given field of tight oil profitable to produce at ever-lower prices. Production from these fields will cumulatively be significant. Supporting this view is the “low price case” developed by the U.S. EIA, in which oil prices do not return to $60 until 2025. Even in this low-price scenario, overall U.S. oil production would still be about a million barrels higher than America’s all-time production peak in 1970.
This supply-driven wave of oil abundance, however, does not rest solely on the fortunes of the United States. The new energy abundance is a global phenomenon, not just an American one. Today, American tight oil production is a major driver of this new energy picture; in 2015, the United States and Canada were together responsible for virtually all global tight oil production. The dominance of global tight oil supply by these two countries will likely be the case for much of the next decade. But, subsequently, the unconventional boom has prospects for going global, with major implications for energy markets worldwide. The fact is that the world’s unconventional oil deposits are both significant and found in several continents. As of the end of 2015, according to the IEA, the world’s total technically recoverable resources of tight oil were massive, exceeding the conventional oil resources of all of Africa—which holds roughly 10 percent of the world’s proven oil reserves and five of the top thirty oil-producing countries.
It will, however, take time before such unconventional oil production outside North America comes online in significant quantities. While there is already modest production in Argentina, countries from Algeria to Russia to China also possess large resources of unconventional oil and gas but have yet to exploit them anywhere nearly as effectively as the United States and Canada. Why?
First, not all geology is equal. Most countries with significant unconventional resources tried, as the United States did, to begin their exploration with shale gas, rather than tight oil. Hoping to replicate America’s experience within their own borders, these countries were frustrated by a number of factors. China, for instance, has vast quantities of shale resources, but the quality of shale and the depth of the deposits make it much more challenging to extract than in North America. Early efforts on the part of countries from Poland to China demonstrate that the leapfrog effect of being able to benefit from the U.S. experience is more limited than originally thought. Success involves not only having access to the needed technology, but knowing how to apply it to the particular shale in question. Fracking, it turns out, is as much an art as a science.
In addition, geology is only one of the determinants of how easily a country can produce its unconventional energy. The institutional framework and the incentives or disincentives it creates are equally important. Environmental and regulatory structures also make a difference, with some countries having more centralized governments and higher environmental standards or greater public sensitivity to fracking than in North America. For example, Bulgaria, France, and Scotland are just some of the European economies that have banned fracking altogether. Russia—another country with vast tight oil resources—has focused more of its limited investment dollars on developing its massive conventional oil. Investment in developing Russian unconventional production has also been dampened by international sanctions. Other factors—such as open lands, access to infrastructure, financing, and water, as well as a competitive company landscape—also explain why the unconventional boom that took off in the United States has been difficult to ignite in other countries.
The EIA and other energy outfits anticipate that production of tight oil will overcome these obstacles to become a truly global phenomenon in the decades ahead. Argentina, Russia, Mexico, Colombia, and Australia could account for approximately a fourth of global tight oil production by 2040. At that point, tight oil production may amount to 10 percent of overall global oil production.
The end of peak oil may be, as some academics like to say, overdetermined—meaning that more than one possible factor could deliver it. Technology will help ensure that more resources are produced at lower prices and these new resources will disrupt old markets in ways that cause actors to abandon old strategies to bolster price; demand may falter over the medium to long term as well. For those who have battled with the specter of peak oil for decades, this truly is uncharted territory. For Bob Belfer, a businessman who made much of his fortune in the oil fields of America’s heartland, the end of peak oil involves a major revision to how he views the world. “For the last forty years,” he told me, “you could wake me up at 3 a.m. and peak oil would be on my mind.” Today, Bob can sleep more peacefully.
Uncertainty of Demand
As mentioned earlier, a se
cond, future wave of oil abundance could be generated by the demand side. We know with confidence that the world is moving out of a period of intense growth in energy demand (which includes, but is not limited to, oil) to one in which the thirst for energy moderates. The decade from 1997 to 2007 saw tremendous growth in global energy demand, propelled by economic growth, population pressures, urbanization trends, and the rise of a global middle class. But if one driver stood out, it was China, whose focus on heavy industry and government-supported investment pushed GDP growth rates to a peak of 14 percent in 2007; China’s demand for energy rose in tandem with these sky-high economic growth rates. Rapid urbanization and the development of megacities with over ten million inhabitants also helped change China’s energy profile. In just the few years between 2002 and 2006, China’s demand growth for energy was greater than it had been over the entire two previous decades. By 2007, China’s needs had transformed the world and accounted for nearly a fifth of all energy demand and almost half of overall global energy demand growth.
Global energy demand growth, while still positive, slowed by more than a third in the years since. Looking forward, various companies and energy agencies agree that demand for energy will rise at slightly higher rates compared to the post-2008 recession period until 2025, at which time energy demand growth will become less robust. In part, these trends are due to weaker, but still positive, rates of economic growth, urbanization, and population expansion. China, in particular, will temper its energy demands as it grows more slowly and as it transforms its economy to be more consumer-oriented and less energy-dependent. Perhaps most significant, the world will continue to become less energy intensive—meaning it will take less and less energy to produce the same amount of economic output, largely due to increases in efficiency. For example, according to one projection, by 2035, the European Union will use the same amount of energy it did half a century earlier, although its economy will be 150 percent larger. This phenomenon will not be limited to the democratic, relatively well-off countries of the Organization for Economic Cooperation and Development (OECD); India and the economies of Africa will also use less energy to produce each unit of output, even while they are industrializing.
Figure 2.1: Energy Consumption by Region
(billion tons of oil equivalent)
Source: BP, BP Energy Outlook 2017, 12.
When it comes to oil—as opposed to the broader concept of energy—many experts and analysts anticipate positive, but declining, demand growth out to 2035 or 2040. One reason to expect positive growth is that nearly all of the world’s transportation runs on oil-based fuels. By one account, the need for fuel for transportation will drive as much as two-thirds of the growth in demand for liquid fuels in the decades ahead. With 57 cars per 100 people in OECD countries and only 7 per 100 in developing ones, ExxonMobil, for instance, expects the absolute number of light-duty vehicles to nearly double from the one billion on the road today. This bump-up in global ownership of vehicles and commercial use of heavy-duty vehicles is expected to be so large that it will dwarf the substantial technological improvements that will make cars roughly 60 percent more fuel efficient than they are today. Others—such as Fatih Birol, the executive director of the IEA—see positive demand growth not as a function of transportation, but as the result of increased oil use in other sectors, such as heating, petrochemicals, or industries.
As Lincoln Moses, the first head of the EIA, once told Congress, “there are no facts about the future.” This is especially worth bearing in mind when considering projections such as those above, which necessarily rely on a number of huge assumptions. An unrelated number of factors could render demand growth for oil much less robust in the coming years than is currently expected. BP, in fact, identifies two such risks in its 2016 Energy Outlook. The first is slower global economic growth. Nothing is more tied to energy use than economic activity. BP posits that if China grew at 3.5 percent, compared to the 5 percent in its “base case” 2016 scenario, the world could lurch into a period of the weakest economic growth in recent history. Growth in world energy demand would decrease to just 1 percent a year, leading to slower demand growth in oil and gas, as well as all other fuels. Certainly, there is sufficient uncertainty around China’s growth path to make this scenario feasible. Just ask the thirty-five economists, strategists, and Wall Street investors who gathered at a private workshop at the Council on Foreign Relations in April 2016 to discuss China’s trajectory. Nearly two-thirds of them anticipated that China’s growth would drop from 6.7 percent to between 1 percent and 3 percent for the next decade; almost a tenth were prepared for China’s economy to contract.
The second scenario BP identifies that could significantly affect demand for oil is one in which the world accelerates its efforts toward a low-carbon-energy future. Policies such as putting a significant price on each ton of carbon, enacting tougher vehicle standards, and legislating efficiency gains in industry and buildings could decrease global energy and carbon intensity at “unprecedented rates.” They would also engineer a steep decline in coal consumption and, over time, cause oil demand to flag. Although these measures would go beyond the policies currently being considered in most economies, it is not impossible to envision their adoption. An extreme natural disaster could galvanize popular opinion and political resolve for more aggressive measures. Less dramatically, countries could revise upward the steps they will take to curb carbon emissions, as much of the world agreed to do periodically at the Paris 2015 climate change conference.
While neither slower global growth nor more aggressive policies to rein in carbon emissions are hard to imagine, the development most likely to eat away at anticipated oil demand growth in the coming decades is technology. By convention, the reference case scenarios—which can be considered “best guess” projections for the future created by BP, ExxonMobil, the EIA, and almost all other energy companies and agencies—only take into account existing technologies. As the unconventional boom itself demonstrated, technological advances that may not factor into such projections could dramatically alter the future.
The potential for technology to upend the demand equation—just as it has revolutionized the supply one—is real. Given oil’s near monopoly on transportation, the technology that would have the most dramatic effect on global oil demand growth would be one that enables cars, trucks, ships, or airplanes to run on nonoil fuel sources at a large scale. Oil and gas companies have different views on this matter. For example, ExxonMobil expects biofuels, natural gas, and other fuels to further encroach on oil in only an additional 5 percent of transportation out to 2040. However, BP’s 2017 “most likely” scenario anticipates growth in electric cars; the company also acknowledges that advances in batteries could dramatically affect cost-competitiveness of electric vehicles and their penetration of the automobile markets as early as 2025.
Outside the oil industry, others are making bolder assessments about just how quickly electric cars or other technologies could begin to challenge oil’s dominance in the automotive sector. I met Dr. Salman Ghouri on a steamy hot day in Doha in August 2016 during my first trip to the headquarters of Qatar Petroleum. I was looking forward to meeting Dr. Ghouri, the head of its strategic planning department, and a good friend of one of my close colleagues. Once Dr. Ghouri secured a waiver to let me in the gleaming World Trade Center offices despite the knee-length skirt I was wearing, we settled into a surprising conversation. Rather than focusing on the low energy prices then seizing the attention of the rest of the Gulf, Dr. Ghouri spoke energetically about his recent work, which predicts a dramatic absolute decline in oil demand in the transport sector by 2040, mostly due to the penetration of electric vehicles. When I asked about the reaction of his colleagues when he presented his research in Qatar, he said, “People laughed at me. They just laughed. And then they were angry—why am I presenting such ideas?”
While such ideas may still be the source of ridicule in oil- and-gas-producing states, Dr. Ghouri is not alon
e in his predictions. Months later, I had a similar conversation in Moscow with energy economist Maria Belova about her research on how innovations in batteries will spur electric cars to displace oil demand. She posits a number of scenarios, but none of them look favorable to those banking on growing oil demand; both her “most likely” scenario and her “innovative” scenario anticipate substantial absolute declines in oil demand by 2035. In the United States, Bloomberg New Energy Finance (BNEF), a research group focused on energy trends, told the world in February 2016 to prepare for dramatic changes in the transportation sector, even within the coming decade. Their analysts concluded that, by 2022, new technologies would make electric cars cheaper than the internal combustion ones that most of us drive today. With this advance in mind, BNEF saw plug-in cars going from just one-tenth of 1 percent of the global car market in 2016 to a third of all new cars sold and a quarter of all the cars on the road in 2040. According to BNEF, this would displace 13 million barrels of crude oil a day—significantly more than Saudi Arabia produces every day or nearly one out of every seven barrels of oil consumed globally in 2016. Oil markets, however, would not need to wait until 2040 to see the impact. BNEF made various calculations suggesting that electric vehicles could lessen global demand for oil by 2 million barrels a day as early as 2023, potentially triggering a significant glut in oil markets.
Others see demand for oil clocking in far under conventional expectations for other reasons. Anthony Yuen of Citigroup suggested to me that Chinese consumers may buy many fewer cars than anticipated—perhaps between 300 and 400 per 1,000 people rather than the much larger numbers that others were predicting a decade ago. This change would be largely the result of the Chinese government’s aggressive policies to limit driving and gasoline consumption and to promote other forms of transport. Others still attribute slower—or even negative—demand oil growth to growing efficiency, or a “mobility revolution” in which a combination of autonomous vehicles, car sharing, and ride pooling collectively dent overall oil demand.
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