Peak Demand Looms in Oil Industry’s Future

With demand growing for electric vehicles, new sources of energy, and countries like China implementing policies to reduce emissions, the prospect of the oil industry reaching peak demand, the point at which demand for gas and other petroleum products begins to permanently decline, is a growing concern for petroleum companies. Royal Dutch Shell and Statoil believe it could arrive as early as the mid-2020s, leading many companies to seek alternative investments in areas such as biofuels to hedge the risk. Statoil itself has begun to explore entering the renewable energies space.

The International Energy Agency (IEA), however, is less pessimistic about the decline in oil in its three forecasted scenarios regarding the industry’s future. Only one of these, which occurs if nations honor commitments to cap the rise in global temperatures to 2 degrees Celcius, forecasts any decrease in overall global demand before 2040. It also notes that demand for passenger vehicles is expected to slightly decline but vehicle demand will increase for shipping and aviation.

The future of oil depends heavily on two factors that influence customers’ and businesses’ decisions to switch energy sources: regulation and price. As previously mentioned, IEA estimates for demand drop with envionmental regulations, as government mandates can cause customers like chemical companies who are less likely to have alternative supply options to reduce use. New technologies would have a similar effect, making it easier or necessary from a cost perspective to switch to the newer alternative. For consumers and their cars, the larger force at work is price. Higher prices incentivize them to switch to public transportation or carpooling options and, increasingly, alternative fuel vehicles, while lower prices dampen this impact but force oil companies to become more efficient.

With oil prices held constant by U.S. and OPEC producers and a presidential administration that does not favor more energy regulation, which of these futures will come to be remains uncertain. Ultimately, Americans are likely to see deeper incursions from traditional oil companies into renewables and others’ following Saudi Aramco’s decision to focus more heavily on oil products for petrochemicals. If prices do rise, so will the availability of electric cars and charging stations that will fill the void left by petroleum. In the long-term, American consumers may not have to choose which gas station to visit, but which energy source.

For more, visit Financial Times.

Image copyright: Image Source, Photographer, License Summary.

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