Monday, December 28, 2020 / 12:23 PM / by Alex Kimani of Oilprice.com / Header Image
Three months ago, British oil giant BP Plc. (NYSE:BP) sent shockwaves through the oil and
gas sector after it declared that Peak Oil demand was already behind us. In the
company's 2020 Energy Outlook, chief executive Bernard Looney pledged that BP would increase
its renewables spending twentyfold to $5 billion a year by 2030 and".... not enter any new countries for oil and gas
exploration". That announcement came as a bit
of a shocker given how aggressive BP has been in exploring new oil and gas
The investing universe appears to concur with BP's
sentiments, with the oil and gas sector consistently emerging as the worst
performer over the past decade. The sector suffered yet another blow after the
largest investor-owned oil company in the world, ExxonMobil (NYSE:XOM), was kicked out of the Dow Jones Industrial Average in August, leaving Chevron (NYSE:CVX) as the sector's sole representative
in the index.
Meanwhile, oil prices appear stuck in the mid-40s with
little prospects of climbing to the mid-50s that most shale producers need to
Delving deeper into the global oil and gas outlook
suggests that it's peak oil supply, not peak oil demand, that's likely to start
dominating headlines as the quarters roll on.
Peak Oil Demand
many analysts talk about Peak Oil, they are usually referring to that point in
time when global oil demand will enter a phase of terminal and irreversible
According to BP, this point has already come and gone,
with oil demand slated to fall by at least 10% in the current decade and by as
much as 50% over the next two. BP notes that historically, energy demand has
risen steadily in tandem with global economic growth with few interruptions;
however, the COVID-19 crisis and increased climate action might have
permanently altered that playbook.
BP has modeled 3 possible scenarios for the future of
global fuel and electricity demand: Business as Usual, Rapid Transition, and
Net-Zero. Here's the kicker: BP says that even under the most optimistic scenario
where energy policy keeps evolving at pretty much the pace it is today
(Business as Usual) oil demand will still suffer declines-only at a later date
and a slower pace compared to the other two scenarios.
The oil bulls, however, can take comfort in the fact
that under the Business-as-Usual scenario, BP sees oil demand remaining at 2018
levels of 97-98 million barrels per day till 2030 before falling to 94 million
barrels per day in 2040 and eventually to 89 million barrels per day three
decades from now. That's a loss in demand of less than 1% per year through
However, things could look very different under the
other two scenarios that entail aggressive government policies aimed at
reaching net-zero status by 2050 as well as carbon prices and other
interventions aimed at limiting global warming.
Under the Rapid Transition scenario (moderately
aggressive), BP sees oil demand falling 10% by 2030 and nearly 15% under Net
Zero (most aggressive).
In other words, the decline in oil demand is bound to
be catastrophic for the industry over the next decade under any other scenario
other than Business-as-Usual.
Luckily, this is the scenario that's likely to
dominate over the next decade.
David Blackmon, a Texas-based independent energy
analyst/consultant, has told Forbes that many analysts are skeptical
about BP's grim outlook. Indeed, Blackmon says a "Business as Usual" scenario
appears the most likely path for the time being, given the time the global
economy might take to recover from Covid-19 as well as the trillions of dollars
that would be required to implement the other two cases.
Further, it's important to note that BP made those
projections before Covid-19 vaccines had entered the fray. With several viable
vaccine candidates now on the scene, there's a good chance that the global
economy might recover at a faster-than-expected clip and thus help oil demand
to recover more rapidly than earlier estimates.
Peak Oil Supply
rarely discussed seriously, Peak Oil Supply remains a distinct possibility over
the next couple of years.
In the past, supply-side "peak oil" theory mostly
turned out to be wrong mainly because its proponents invariably underestimated
the enormity of yet-to-be-discovered resources. In more recent years,
demand-side "peak oil" theory has always managed to overestimate the ability of
renewable energy sources and electric vehicles to displace fossil fuels.
Then, of course, few could have foretold the explosive
growth of U.S. shale that added 13 million barrels per day to global supply
from 1-2 million b/d in the space of just a decade.
It's ironic that the shale crisis is likely to be
responsible for triggering Peak Oil Supply.
In an excellent op/ed, vice chairman of IHS Markit Dan
Yergin observes that it's almost inevitable that shale output will go in
reverse and decline thanks to drastic cutbacks in investment and only later
recover at a slow pace. Shale oil wells decline at an exceptionally fast clip
and therefore require constant drilling to replenish the lost supply. Although
the U.S. rig count appears to be stabilizing thanks to oil prices rebounding
from low-30s to mid-40s, the latest tally of 320 remains far below the year-ago figure of 802.
Although OPEC+ nations currently have about 8 million
barrels of oil per day of spare capacity, the current price levels do not
support much drilling at all, and the extra oil might only be enough to cover
the shortfall by U.S. shale.
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