In 2006, rather by accident when reading an investment article, I came upon the term and concept of "Peak Oil." I was hooked, and wrote a First Thoughts column on it shortly thereafter.
Back then, hardly anyone had heard the term, as I know from asking at a few speaking engagements around the time how many in the audience had heard the term. Few raised their hands.
But Peak Oil became much more known in 2007 and 2008, when oil prices first surged to a once unthinkable $100 per barrel, then peaked at nearly $150 in July of 2008.
Gilmore Says.... |
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| Despite some chance oil prices could trend a bit further up from here, the long term trend is likely to be down - because global demand will peak in perhaps less than 10 years. |
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What do you say? |
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After a long career in logistics, a man named Chuck Taylor went on a 2-3 year campaign warning supply chain managers about the looming impact of Peak Oil. "We're not going to run out of oil, but the oil we can produce will be hard to extract and expensive," sending gas and diesel prices soaring, Taylor said as recently as early 2012 on an SCDigest videocast.
His efforts in this area were the key to Taylor winning CSCMP's Distinguished Service Award in 2010. (Taylor later died unexpectedly in July, 2012).
What is - or maybe better was - Peak Oil? It is a concept derived from the work of a Shell Oil engineer back in the mid-1950s named M. King Hubbert. To the dismay of his employer, Hubbert wrote a paper from his study of the behavior of oil wells.
Naturally enough, when wells are young and contain a lot of pressure, the oil comes out pretty easily. That flow then diminishes over time, and the oil is harder to extract. It becomes fairly easy to predict, Hubbert said, when the maximum output from a given well will be reached. After its peak production for say a year's time, output will then decline over time even though there may still be a good amount of oil left in the ground.
That concept can be taken from an individual well to an entire oil field, to a nation, and even to an entire globe. At the time, Hubbert in fact predicted that the US would reach Peak Oil in 1970, to the scorn of many other oil men at the time.
He was almost dead nuts on. In 2010, Global Peak Oil was expected to be reached any day, if it hadn't happen already. There was talk of $200 oil. I was a believer.
And we were all very wrong, it appears. No one talks about Peak Oil today. What is the issue du jour today in the oil patch is now instead Peak Demand. More on that in a second.
What happened? A couple of things. First, growth in the demand for oil globally started slowing much faster than predicted, and has actually been falling in most developed economies in recent years, the result of technology improvements, alternative fuels and more.
In addition, US oil output surged with fracking technology, putting it at or near the top of oil production globally. What this did was: (1) change the demand-supply demand balance dramatically, from what modestly in supply's favor to moving to the demand side, as US oil flooded the market. Combine that with a tepid global economy, and oil price fell dramatically in 2014 and then stayed there, with remarkable stability (despite a recent modest upturn in prices to the $60 range.)
And despite some chance oil could trend a bit further up from here, the long term trend is likely to be down - because global demand will peak in perhaps less than 10 years.
This is obviously of great concern to oil companies - and many countries themselves. While predictions for Peak Demand vary a bit, as seen in the chart below, most agree it will come within two decades, three at the max, though a couple of oil companies see no peak coming. I think they are wrong.
And that is in large measure because it now seems to me inevitable that electric cars and maybe even trucks are going to reach a critical share of new vehicle purchases very soon.
"The idea that electric vehicles and alternative forms of energy will increasingly displace crude oil is one that big-name investors are starting to ask about," the Wall Street Journal wrote in May.
China, for example, is building 800,000 charging stations for electric cars just this year alone. Meanwhile, the country's vice minister of industry and information technology said China is working on a timetable to end sales of fossil-fuel-based vehicles, in a market that comprises a full one-third of the global auto sales.
China is hardly the only one. Recently, France and the UK said they are planning to phase out sales of non-electric cars by 2040, while Norway aims to reach that point a decade sooner. Indian Prime Minister Narendra Modi's hopes to see electric vehicles rise to 44% of the purchases by 2030.
Then we have the Tesla Semi electric truck, sort of previewed last week by CEO Elon Musk, and said to be available by 2019. Walmart, JB Hunt, Meijer and other companies have pre-ordered test units. Musk says one model will get 300 miles per full charge and another 500 miles, with the latter able to get a fast charge that in just 30 minutes will take it 400 miles.
Now as we reported this week, many are saying the battery performance Telsa is claiming simply doesn't exist today, and is highly unlikely to arrive by 2019. But even if that is true - and I think it is - a skeptical Heavy Duty Trucking magazine wrote last week that "Regardless of what you think of Elon Musk and his new truck, bear in mind that he is a visionary" and "is going to impact this industry in one way or the other in the coming years."
It also noted that in the past year we've seen either major product reveals or investments in electric trucks by a host of companies, including, Navistar, Volkswagen, Daimler, Volvo, Cummins, Nikola, Isuzu, and Paccar as well as newer players such as Uber, Embark, Einride, and Waymo. That's not to mention work being done - rapidly - on hydrogen fuel cell trucks.
I firmly now believe we are at the beginning of the end of the fossil fuel era, with profound impacts on society, our supply chains (much more stable costs), and geo-politics. What happens when we just don't care about Middle East Oil? What will be the fallout when countries in that region, and more worrisome Russia, see their state revenues slashed further as oil demand and prices collapse?
I don't know if it's 2025 or 2040, but the world is soon enough going to be very different indeed. Fossil fuels will still be around, but in a much dimished state.
Is Gilmore right or wrong on the coming end of the fossil fuel era? How fast is the decline likely to be? Let us know your thoughts at the Feedback section below.
Your Comments/Feedback
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Mark Wilder
Distribution Manager, T. Marzetti Company |
Posted on: Nov, 30 2017 |
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My suggestion would be to view the oil market like the stock market. There will always be fluctuations in the short-term, but what is the long-term trend?
I’ve also read various authors on this subject and most seem to agree on a few facts:
· Oil is a non-renewable resource.
· Demand for oil will generally increase with population growth.
· While alternative sources of energy exist, none can yet do everything that oil does, as economically as oil does it.
· Price of oil can be affected by many factors such as supply, strength of the economy, value of the dollar, and Mideast tensions.
I think the crises has been temporarily averted due to the factors in the 4th bullet, but not permanently resolved.
The underlying problems in the first 3 bullets still exist. This will occur, the only question is when.
Editor's Note:
Thanks for the response. I used to think almost exactly this way, but as I hope made clear I believe electric cars are will soon gain critical mass and upset your bullet number 2.
Dan
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Mike Entner
Global Service Quality Assurance Manager, The Dow Chemical Company |
Posted on: Nov, 30 2017 |
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| First of all you seem to be using the term Peak Oil in a couple of different ways – Peak oil in the sense that the output of a given well will peak early in its life and drop off at a predictable rate. Extending this to an oil field works in that the area with a bunch of wells I guess will behave in a similar manner.
Then you try to use this to talk about global peak production but that not only depends on the production of existing wells and fields but also on new exploration – the end of oil production from all the existing fields in the world would only give you an estimate of Peak production if no new production was developed. Global Peak production needs to take into consideration new production from new wells / fields and getting more out of existing fields by techniques like fracking.
The third use of Peak Oil comes in when you start talking about price – if production is slowed to barely meet demand ( thank you OPEC) then the price will go up. So a higher price may not be because production capability has peaked only because actual production has peaked.
The other major issue that I feel is lacking in the article is the fact that not all oil is used for transportation. While it is a major player some is used for electrical generation and some is used for manufacturing of things (plastic is likely the largest user so I will just use plastic for this area). While developing economies may get electric transportation something still needs to generate the electricity and if the price of oil falls because less is used in transportation people are likely to start using it to create electricity which will be in high demand from the electrical transportation and other uses in the developing countries. Developing countries will also be purchasing more things like refrigerators which need plastic and electricity thus more use of the oil.
So the article is asking will the demand for oil peak, without a detailed analysis on all of the factors it is hard to say – my gut feel is that if demand peaks the drop off will not be fast giving companies and countries time to react to the changes.
Editor's Note:
Thanks for feedback – I love the debate.
Just couple of quick comments:
1. It’s not me but Peak Oil theory that applies it at multiple levels. Originator Hubbert in fact was the one who applied observations from individual wells to nations and ultimately globally.
2. There is no question that new sources – e.g., fracking – have upset the Peak Oil model. Hubbert did not envision this. But I can just say from my research Peak Oil is really of little concern to oil companies/countries today, its Peak Demand. I am not making such a prediction myself, but look at the chart – Royal Dutch Shell, an oil company, say Peak Demand will occur in 2025-2030. Others push it out further, but agree it is coming.
3. I agree fossil fuels – largely natural gas – will probably be used to generate electricity for some time – though solar is making gains much faster than expected. To be clear, I am no fan of solar subsidies and am hardly an anti-fossil fuel person. I also recognize the use of oil/nat gas in making chemicals/fertilizer/plastics, etc. which may continue for decades or forever. But I think as electric cars will become common, it will start to feel like the end of the fossil fuel era, which will accelerate changes in other areas, such as more solar.
As I wrote, we’re not at the end of course, but maybe not far from an inflection point that marks the beginning of the end, which we might agree is reaching Peak Demand.
And on top of all that, it’s good to be a bit provocative to stir the debate.
We’ll know a lot more before long!
Thanks again.
Dan Gilmore |
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Rajeev kashikar
NA, Mumbai, india |
Posted on: Nov, 30 2017 |
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| Thanks for the article... was interesting.
I guess Gilmore is spot on and we indeed have entered an era of long term decline of fossil fuels
I think it will be another 20 years by the time alternate fuels will have a greater share than fossil fuels.
I think that countries like india and some other emerging markets - all large consumers of oil - are slow to adapt to new technologies and thus will continue to consume oil for 20-25 years before they have also achieved parity with advanced economies in terms of use of alternate fuels. |
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Jack A Cuneo
Title, JP Venture Partners |
Posted on: Nov, 30 2017 |
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| The change that is coming to transportation through the development of electric vehicles has great promise, but until there are major breakthroughs in alternative generation of electricity, we will still be dependent upon hydrocarbons.
It’s important to ask what’s creating the electrical power to charge the batteries, think about what’s on the “other side of the charging station.” |
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