The End of the Fossil Fuel Era?

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.

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 diminished 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 button below.