Peak Uncertainty

A decade ago, the idea that worldwide oil production might reach its peak level and start to decline was one for the fringes. It was certainly one that was hard to square with the evidence at the gas pumps, which in 1998 showed gasoline selling for inflation-adjusted record lows. When Scientific American published an article called “The End of Cheap Oil” that year, it felt like someone warning of a drought during a downpour.

Today, the so-called peak oil theory is a firmly mainstream, if not majority, opinion. Indeed, the interesting question seems to be not if petroleum production will peak at all, but whether it peaks this decade or sometime after, and at what level. And ancillary to this is a rich stew of arguments, ranging from the apocalyptic (peak oil will lead to the end of civilization) to the panglossian (peak oil will keep us from destroying the ecosystem).

Over the past year, however, a new prospect was raised—peak demand. In this scenario, conservation, efficiency efforts, and the development of alternative fuels in developing nations would reduce consumption there so much that there would be no need to put additional net production capacity online. Instead of bumping into a hard geological (or geopolitical) limit, crude oil production could cruise along at around 70 million to 80 million barrels a day indefinitely.

The aftermath of the Great Recession seems to bear some of this out. Vehicle miles driven, the aggregate of every trip taken by American motorists as calculated by the Federal Highway Administration, is down sharply from its pre-recession peak. After climbing steadily for several decades, eventually topping more than 3 trillion miles, the distance traveled dropped by nearly 3 percent and has remained essentially flat.

And that doesn’t even factor in the changes in petroleum demand. Compared to distillate fuel oil, which is off by more than 20 percent since 2008, and jet fuel, which is down a third since a 2000 peak, personal transportation is still somewhat inelastic. If those changes in demand hold, and if initiatives such as increasing the fuel efficiency standards and mandating more biofuels work as planned, then oil consumption in the U.S. might remain below its peak level indefinitely.

A curbing of demand has been seen throughout the countries of the Organization for Economic Cooperation and Development, a grouping of the most developed nations. By one estimate, demand in the OECD is off by nearly 11 million barrels a day compared to the trend from the 1990s.

At one time, that would have been sufficient to curb global demand. But in an era in which developing nations, especially China, India, and Brazil, are claiming stake to more resources of all kinds, will increased consumption there swamp any savings in the developed world?

According to a recent paper by economists Joyce Dargay of the University of Leeds in England and Dermot Gately of New York University, global petroleum demand is unlikely to peak, no matter what the developed world does. They note that since 1971, oil consumption in the OECD and the countries of the former Soviet Union has grown at a rate of 0.6 percent per year, which is slower than population growth. Conversely, oil consumption in the rest of the world has grown at a 4.4 percent annual rate, which is faster than population growth there.

Indeed, Dargay and Gately write that since 2000, 55 percent of the growth in global oil demand has come from two sets of countries with little incentive to curb their thirst. One group is made of 18 oil exporters including the OPEC nations, and they can afford to be somewhat oblivious to calls for conservation. They account for 24 percent of demand growth. The other 31 percent of demand growth comes from China, which is in the midst of an unprecedented industrialization drive and seems willing to pay whatever it takes to import oil.

If the trends continue, the economists conclude, oil production will need to increase by another 30 million barrels a day by 2030 even if per capita demand in the OECD remains unchanged. In other words, even if we have reached peak demand in the developed world—and that remains to be seen—anything less than a revolution in oil production in the next 20 years will leave the world short of fuel.

Today, the so-called peak oil theory is a firmly mainstream, if not majority, opinion.