When will oil demand peak?

The oil sheiks of the Arab world are not known to be a particularly unhappy bunch of people, after all they are sitting on many more millions of barrels of crude oil that are commonly perceived to ensure their riches for at least another century.

It's come a bit of a surprise then that the world's biggest oil company, Saudi Aramco, painted a somewhat gloomier picture for its longer-term business by raising the specter of global oil demand to peak sometime around 2040.

The risk to Aramco's business was originally mentioned in a forecast by industry consultant IHS Markit, which has become a part of the Saudi oil giant's prospectus for its imminent share sale in December. Aramco officials acknowledged that the figures were "reliable," signaling a major shift of perception in the kingdom about future demand for oil.

The issue of "peak oil" has been talked about ever since the 1950s, when the late Royal Dutch Shell geologist M. King Hubbert predicted US oil production would top out in the 1970s, with the rest of the world running out of crude soon thereafter. Today we know this hasn't happened because of new discoveries and efficiency gains.

But we've also come to realize that peak oil demand means something entirely different today, as the world is increasingly worried about climate change and the subsequent need for a lot of reserves to be left in the ground.

Big Oil still optimistic

In its IPO document, Aramco argues "social pressure to reduce pollution and carbon emissions" has led to climate change policies which may "reduce global demand for hydrocarbons and propel a shift to lower carbon-intensity fossil fuels such as gas or alternative energy sources."

Surprisingly though, Aramco Chief Executive Officer Amin Nasser still in February had dismissed such talk as "not based on logic and facts" and said it arose "mostly in response to pressure and hype."

A number of other Big Oil executives are still speaking in a similar vein, suggesting the world's hunger for oil will remain insatiable. Darren Woods, CEO of ExxonMobil, for example, predicted a 25% rise in global energy demand for the next two decades, due to "global demographic and macroeconomic growth trends."

"When you factor in depletion rates, the need for new oil grows at 8% a year," he told analysts in March.

Read more: Exxon Mobil: Oil giant prosecuted over climate 'lies'

And Mike Wirth, Chevron CEO, thinks oil and gas will represent "roughly the same share of the total energy mix in 2040 as it does today," meaning oil production will need to grow in line with rising energy needs.

However, there are a number of reasons to think that the oil CEOs might be fundamentally wrong and seem to be missing some important developments.

Murky projections

There's currently a range of about 20 years between the earliest and latest predictions about when peak oil will happen.

The International Energy Agency's (IEA's) 2019 World Energy Outlook report says global oil rises by around 1 million barrels per day (mb/d) on average every year until 2025. But in the late 2020s and during the 2030s though, crude demand increases by only 0.1 mb/d on average each year.

"There is no definitive peak in oil use overall, as there are continued increases in petrochemicals, trucks and the shipping and aviation sectors," the industry group nevertheless predicts.

Other energy market observers, like consultancy firms Sanford C Bernstein, Equinor ASA and McKinsey, are more skeptical about oil's future. Mc Kinsey's Bram Smeets, for example, thinks that demand for crude will peak much earlier. "We believe that demand will peak in the early 2030s at 108 million barrels [per day] and then go back to 100 million by 2050," Smeets told DW.

One of the lead authors of the consultancy's Global Energy Perspective 2019 report, Smeets says the chemicals sector and aviation will support oil demand in the coming years, but expects demand from road transportation and power generation to dwindle. "The emergence of electric vehicles is going to have an impact, although we expect the impact to come over time. Even if the growth of EV sales will be high, it will take time until this will reduce demand for oil."

At the moment, analysts say it's hard to anticipate the changes in technology and policy that could slow demand growth, or even eliminate it altogether. But advances in vehicle efficiency, a rise in electric cars, tighter emissions standards and shifts to other fuel sources could hit oil demand much earlier and harder than the industry may expect.

Seismic shifts underway

Probably the most noticeable shift will take place in the transportation sector, which accounts for 60% of oil use. Electric vehicles (EVs) are being pushed hardest in the fast-growing economies of the emerging world, where oil companies hope to create much of the future growth. China, for example, wants all new vehicle growth to come from electrics, while India has the target of selling 30% EVs by the end of the next decade. In Europe, the UK has announced plans to ban the sale of gasoline and diesel cars by 2040, becoming the second major Western economy to do so after France.

According to IEA projections, the widespread adoption of EVs could take away 5.2 mb/d of oil demand.

But it's not just battery cars that could speed up the move away from the internal combustion engine (ICE). It's also expected that the current norm of individual ownership of cars will gradually make way for ride-sharing in what may be driverless cars as companies like Uber and Lyft push their on-demand services.

In addition to transportation, the global drive toward renewable energy is gathering momentum amid government efforts to curb greenhouse gas emissions. And growth in the use of bioplastics could reduce oil in the chemicals industry, which McKinsey estimates will drive almost 70% of growth in demand for oil through 2035.

On balance, all of those alternatives could displace about 13.5 mb/d of oil demand by 2040, the IEA estimates.

What if we were serious about climate change?

Under the 2015 Paris Agreement, 195 United Nations member states have pledged to pursue efforts to limit the increase of global temperatures to 1.5 degrees Celsius compared with preindustrial levels. If governments around the world were really embarking on policies to curb global warming, the Saudi princes would have every reason to worry about their country's business model. 

"In order to really limit global warming to 1.5 degrees, very significant shifts in the energy systems are required. If that were to happen, we foresee a scenario in which oil demand would already peak by the early 2020s," says McKinsey's Bram Smeets. 

Read more: Fossil fuel output to greatly exceed Paris climate pledges

The IEA has arrived at similar conclusions in its so-called Sustainable Development Scenario presented in the the 2019 Outlook report. The industry lobby group moves the deadline for peak oil even closer to today, saying demand under this scenario would top out around 2020, and declining by about 20 mb/d day by 2040. That's 36 mb/d lower than the average that oil companies forecast for 2040 — a gap larger than the current production of the OPEC oil cartel.

Although such a "worst case scenario" is still seen as unrealistic by most industry analysts, some of them are sounding the alarm bell over dwindling investment that is beginning to hit the supply side of oil.

Between 2010 and 2014, high oil prices of around $100 per barrel have spurred a flurry of expensive projects, which are "barely able to generate value" at an oil price of $50 today, acccording to a recent report by industry consultant Rystad Energy. And Bob Brackett, an analysts at Sanford C. Bernstein, warned in a Bloomberg News interview recently that the three crude sources that powered oil growth this century — deepwater, shale and oil sands — are declining, with growth in the first "peaking in 2020," the second "a few years later," and the future of oil sands "in question" due to CO2 concerns.

"Over the longer term, the investment patterns suggest that oil majors actually buy into the concept of peak oil," the consultancy wrote in a report, suggesting that Saudi Arabia's reserves in the ground, lasting for another 100 years, could become "stranded assets."