A Very Stable Relationship: Oil Intensity and the Timing of Peak Oil By Christof Rühl and Tit Erker I. Introduction Discussions of peak oil are not new. Historically, they have focussed on the supply side. Fear of “running out” has been a faithful companion to the 160-year history of oil markets and, for that matter, to the history of coal preceding it.1 Humankind, however, has never exhausted a primary energy resource. Just the opposite. Since the dawn of the industrial revolution, every primary fuel has been growing. Fuel shares have shifted but global energy demand was strong enough to entice absolute growth in all of its components. That such an outcome was possible, without “running out”, is testament to the power of price incentives and the human capacity to innovate. The credit for having predicted it accurately goes to economic reasoning. Over the last decade or so, this debate has tilted toward peak energy demand. Partially, this reflects the historic record: Coal consumption, for example, has started to come down recently. This may or may not be permanent. But even if it were, it would not have been triggered by a lack of supplies.2 For the most part, however, the new focus on demand appears to be motivated by the ‘Energy Transition’, i.e. the need to explore the consequences of transforming the world’s fossil energy system into one that minimizes greenhouse gas (GHG) emissions. To conceptualize peak fuel demand in the context of the Energy Transition is not complicated: It means to accept the proposition that the binding constraint on fossil fuel consumption need not be the human ability to find, process and burn hydrocarbons. Rather, the constraint now becomes the limited (and unpriced) capacity of the atmosphere to absorb the resulting emissions. This constraint is most popularly expressed in terms of the available ’carbon budget’. From this perspective, fossil fuel consumption needs to be reined in before the carbon budget is exhausted. Absent a price for greenhouse gas emissions (actually, even to install one), limitations have to be superimposed by political fiat; inevitably, the boundary between positive analysis and normative ends becomes blurred in this strand of literature. Oil exemplifies the two poles of this debate. 1 William Jevon’s (of “Jevon’s paradox” fame) warned that the UK would lose its competitive advantage in industry because of peak coal (1865) just around the time when the first commercial oil well (1859) in the US was about to take the world in an entirely different direction. 2 Nuclear energy is the only other primary fuel where we observe a tendency for absolute growth to peter out – but again, not because of supply constraints. On the supply side, it has just come through the so-called ‘shale revolution’. There is near universal acknowledgement that technological prowess has shifted the frontiers of finding oil yet again, and so decisively that no one expects (geological) constraints over the foreseeable future. On the demand side, the transport sector, responsible for almost 60% of annual oil consumption, is attracting large attention in the decarbonisation debate.3 A flurry of studies, estimates and scenarios are available to detail how electrification and other modifications in transport may impact future oil demand. In addition to these structural aspects, the Covid-19 pandemic has provided renewed impetus to revisiting the peak oil debate. It has hit oil demand hard. Initially, the pandemic was conceived as a one-off, a transitory shock that would give rise to a rapid cyclical adjustment. The longer it lasts and the clearer its impact on the economy, the more obvious it becomes that the consequences of this shock may be far from transitory. The pandemic will cause permanent economic losses; it may even alter human behaviour, both with consequences for future oil demand growth. This paper assesses the prospects for oil demand to peak in the foreseeable future. It falls outside the two big boxes just established because it does not assume binding supply side constraints; and likewise, it makes no attempt at forecasting regulatory change in the wake of the Energy Transition. Instead, it extrapolates a broad efficiency measure, the rate of decline in oil intensity; and asks what the combination of long-term efficiency improvements with standard economic growth forecasts can tell us about the future of oil demand. In a second step we integrate the permanent damage the pandemic is estimated to inflict on global economic performance, and hence oil demand (alas, without speculating about longer term behavioural changes). Combining historic improvements in oil intensity with the not-so-transitory economic shock of the pandemic yields, ceteris paribus, a surprising result: If matching the extrapolation of regular, pre-pandemic efficiency improvements with current expectations of post-pandemic economic growth is any guide, oil demand has peaked in 2019; although economic and oil consumption growth will return after that date, it would take implausibly high economic growth rates to shift the peak further into the future. Questions about the timing of peak oil are not an esoteric exercise. It may not be widely recognized at present but a durable demand plateau or peak will have formidable consequences, including beyond oil markets. We conclude by outlining two of them, namely the impact on the structure of the global oil market and on the strategy of international oil companies (IOCs). II. A very stable relationship (a) Peak demand Oil is the largest of all primary fuels. It has been the world’s dominant fuel for almost sixty years; and although its market share has been declining from 50% in 1973 to about 33% currently, in absolute terms global oil consumption has continued to grow smoothly ever since records exist – on average 1.3% per annum since the turn of the millennium, and 1.6% over the last ten years. Oil consumption growth (and its composition) varies widely across regions.4 3 The transport sector is both highly visible and a large contributor to global GHG emissions. It accounts for 16% of total global GHG emissions and 23% of energy related GHG emissions, not counting indirect emissions (in the production of cars etc.). IPCC (2018) 4 In this note, ‘oil’ is defined as per the data source (BP 2020), and essentially as ‘all liquids’: Inland demand plus international aviation and marine bunkers and refinery fuel and loss. Consumption of biofuels is excluded; derivatives of coal and natural gas are included. 1 Figure 1: Global oil demand Global oil demand actuals 1965-2019 (Million barrels per day, Mb/d) 100 90 80 70 60 50 40 30 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 Source: BP Statistical Review of World Energy June 2020 Analytically, oil consumption growth is a function of price changes and a society’s income growth (which can be further disaggregated to incorporate population growth). In the long term they are hard to disentangle but econometric studies emphasize the role of the economy.5 For oil demand to peak or plateau in a growing economy, economic and oil consumption growth need to decouple. And for this to happen, like for any other input factor, the rate of growth of oil productivity has to exceed the rate of growth of GDP. Many of the world’s advanced economies have demonstrated that such a decoupling is indeed possible. It does, however, appear to be the result of regular efficiency gains and long term changes in the structure of the economy, rather than of deliberate policies, including policies to foster the Energy Transition. Oil consumption has peaked in a number of jurisdictions (mature economies all of them), lending further credence to the prospect of a global demand peak. OECD consumption reached its highest point so far in 2005. Within the geographic space of today’s European Union, oil consumption last year has been 18% below its 1979(!) peak – despite its economy having more than doubled in size since then. Other large economies are in a similar place. One corollary is that the sources of global demand growth have become more concentrated: two thirds of incremental consumption today originate in Asia; and, leaving aside the US in the years after the shale revolution, demand growth has for years been dominated by China, India and the Middle East. All told, oil consumption since the turn of the millennium has grown on average 3.3% p.a. outside the OECD, but declined -0.3% in the OECD, -0.7% in the EU and -2% p.a. in Japan. The decline rates are changing only slowly and over long time periods – it is a demand plateau rather than a peak.6 Figure 2: Peak oil demand (a) OECD oil demand (Mb/d) (b) EU oil demand (Mb/d) (c) Japan oil demand (Mb/d) 50 16 6.0 2005 1979 1996 15 5.5 45 14 5.0 40 13 4.5 12 4.0 35 11 3.5 30 10 3.0 9 2.5 25 8 2.0 20 7 1.5 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 1965 5 Literature (Krugman debate) 6 For the past ten years, average growth p.a. has been +3.0% in the Non-OECD, +0.1% in the OECD, -0.6% in the EU and -1.4% in Japan.