Get Ready: A Different Kind of “Peak Oil” Is Coming

David Fessler By David Fessler
Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

Nearly a decade ago, I talked about the concept of “peak oil.” Simply put, this theory states that global oil production will hit a maximum level before declining.

When oil prices hit a record high of $147 a barrel in July 2008, many analysts focused on the supply-demand equation and the topic of peak oil. Back then, peak oil pertained to supply.

People saw out-of-control global demand as a sign that the supply would peak… before it would run completely dry.

But then the introduction of hydraulic fracking and horizontal drilling blew the peak oil argument right out of the picture. So much new supply has been developed over the last decade due to fracking, and the U.S. is now the world’s top crude producer.

Fast-forward to 2018. The introduction of electric vehicles is close to its tipping point.

When that happens, EVs will quickly become the dominant vehicles offered for purchase at car dealerships around the world.

And that means we will approach “peak oil” once again. But this time the concept is entirely different…

This time, peak oil is all about demand. With the introduction of EVs, we’ll slowly start to see a reduction in the demand for gasoline and diesel.

And that means a reduction in the demand for crude. That will have far-reaching ramifications for the oil industry.

In BP’s latest Energy Outlook, the oil giant sees crude demand slowing and then plateauing in the late 2030s.

In this scenario, BP expects 190 million EVs in circulation by 2035. That’s almost double what it predicted in last year’s Energy Outlook.

And by 2040, 320 million of the 2 billion cars on the road worldwide will be EVs, according to BP’s projections.

That’s a hundredfold increase over today’s EV numbers.

But that’s only part of the story. By 2040, autonomous vehicles will also be widespread – and most of them will be EVs.

Today, EVs are racking up only about 2% of all passenger vehicle miles. Fast-forward to 2040: EVs will account for at least 30% of passenger miles.

BP thinks oil will peak around 18.7 million barrels per day and finally start declining by the end of the next decade.

Personally, I believe the peak will be lower and the decline will begin sooner…

This is according to Fessler’s Second Law of Technology: “When it comes to technology, change happens much faster than anyone expects it will.”

For a precedent, all you have to do is think about is how rapidly mobile phones have become widespread. It took a decade or less for half the world’s population to have phones in their pockets.

So why would the widespread adoption of EVs take any longer? Battery pack energy densities are rapidly increasing and their costs are rapidly dropping. I think we could hit the new “peak oil” by 2025.

I think half the vehicles on our planet’s highways could be EVs by 2040. That would bring down crude demand much faster than what the current projections expect.

Still, some oil executives continue to kid themselves. Most notably, the CEO of Saudi Aramco.

Amin Nasser doesn’t see EVs as a threat for at least several decades.

Royal Dutch Shell, meanwhile, seems to be getting the message. It’s increasingly focused on natural gas and is moving away from oil. French oil giant Total is doing the same.

The exact date of “the new peak oil” isn’t easy to predict. The important thing is that it’s coming. Sooner than many think.

That’s my opinion. What’s yours? Share your thoughts in the comments section below.

Good investing,

Dave