Guest blog by SA Shelley: (Note from your OWOE editor: This demand blog was written a few weeks before the oil supply war started. The oil supply war and corresponding drop in oil prices will be discussed in an oil supply blog in a few weeks. However, the author firmly believes that COVID-19 and a likely economic recession are short term demand shocks. Long term demand decline resulting from shifts in technology and consumer behavior, key issues addressed in this blog, is inevitable.)
The world has hit peak oil demand. I wrote it, I’m standing by it, and no apologies to anyone for this.
Most recently, a lot of worry has beset the industry over falling oil demand due to the COVID-19 outbreak (see cnbc.com and bloomberg.com). Barely a month or so before this, the oil industry panicked over a potential war between the U.S and Iran that could reduce global oil supply. Last week a refinery fire was a threat to oil demand. Next week, it could be news that Elvis was spotted driving a Hummer in Helena. These are short term events triggering short term price reactions initiated by options traders changing their positions. Everybody needs to chill, take a deep breath and look far out into the future at the bigger problem in the world, i.e., having excess oil supply as oil demand begins to fall. Quick fortunes can be made by quick trades, but the long game builds dynasties and new industries.
Demand Will Start Falling, Gradually at First, then Precipitously
In last year’s blog about oil demand, I provided a graph indicating that the year-over-year change in oil demand has been steadily slowing for the last couple of decades. I’ve updated that chart, Fig. 1 below, to incorporate the current panic about COVID-19 affecting oil demand in the first quarter of 2020 and OPEC’s overall reduced outlook, and I changed the trendline to a 2-year moving average (dashed, red line) to help oil traders better understand the picture.
Current global oil consumption is just under 102 million bbls / day. But with around 0.5% annual demand growth, we’re effectively at zero demand growth, and we’ll soon be in sustained demand decline for several reasons.
- New Technology Is Beginning to Have a Noticeable Impact on Oil Demand
1% of oil demand growth per year is around 1,000,000 bbls / year. Technology now coming on line can cost-effectively and easily displace that volume of oil within a year or two. For example, as noted in a prior blog, every 1,000 Electric buses (Ebuses) on the road displaces 500 bbls of oil demand per day. Two years ago there were about 300,000 Ebuses on the road, which removed about 150,000 bbls / day of oil demand. By the end of this year there will be about 500,000 Ebuses on the road, eliminating another 100,000 bbls / day of oil demand. By 2025, there will probably be an additional 700,000 EBuses on the road worldwide, eliminating another 350,000 bbls /day of oil demand. This is all within the noise range of oil flows and doesn’t take into account other large vehicle fleets that are transitioning to electric drive. “…fleet operators are a little different. They really run the numbers.” UPS, which is planning to deploy 10,000 electric delivery vans, has probably done some careful cost calculation to justify its decision. Add another 100,000 electric delivery vans for Amazon, and fleets are going to put a big dent on oil demand very quickly. To paraphrase a philandering president, “It’s the fleets, stupid”.
- Changes in Social Habits
Or is it? Every year, some analyst decries the imminent arrival of self-driving cars as fanciful and deluded. Even as recently as a few years ago many analysts warned that EVs are too expensive, too impractical and just toys for the idle wealthy. But what analysts overlook is the changing social habits, wherein younger folks are eschewing vehicle purchases and choosing to live in areas with access to good public transit and vehicle sharing. These shifts in social values are already being felt in demand for new vehicle sales – ICEs included. This means that the pool of gasoline guzzling personal vehicles on the road is shrinking. Toss some cool EVs into the mix and you’ll have even fewer gas guzzlers driving around.
- Old Uses for Oil Will Be Supplanted by Natural Gas
After transportation, residential or industrial heating is another large use for oil. Some analysts argue that the conversion costs for existing industries are too expensive. I propose that as new industries arise and existing industries renew, gas will be the first choice (or maybe renewables), and oil won’t be considered at all. Natural gas is cheap and so abundant now that the cost versus benefit of using natural gas instead of oil for industrial heating is getting to be very attractive..
- Developing Economies Are Actively Looking for Ways to Stop Using Oil
China and India, along with a host of other developing nations, were going to be the saviors of oil demand growth just as OECD oil demand falls. Well that’s no longer a guaranteed thing.
- Physical Oil Flows Have High Variability
Getting and keeping hard, precise data about oil supply and demand is an imperfect endeavor. Many producers don’t share data and many consumers also “adjust” data. It is very likely that the variability in oil trades is more than 1% or even as high as 5%. Thus until someone can design a trading system that objectively measures physical oil flows to less than 1% variability, we’re in the noise region. So, if future oil flow data cannot be trusted, then any future increases reported will also be suspect.
All of these factors lead me to bravely conclude that we’ve hit peak oil demand. I’ll concede that oil demand could pop up a bit to 103 or maybe 104 million bbls / day, but that’s just wiggles in the noise. The time when annual oil demand grew yearly by several million bbls / day are long gone.
Big oil started with Rockefeller supplying kerosene for lighting. But then the invention of electrical technology nearly killed the oil industry, and it wasn’t until automobiles, requiring liquid fuels, began arriving in large markets that the oil industry was saved. I’m sure that when electric lighting reared its ugly head, there were executives in the oil companies dismissing the technology as unproven and unreliable. Yet here we are again, 100+ years later, with electrical technology poised to kill oil once again. Oil industry executives in Houston, Dubai, and Moscow should read a bit of history and then worry more about the future.
Vive l’Alberta Libre!
P.S. As always, for a small fee, OWOE staff will be happy to help the oil industry worry less about the future.