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15-11-2010, 12:08 PM
Extracted from PetroMin (Sept/Oct 2010)
Peak Oil: Peak Oil Supply or Peak Oil Demand? Is There Something to it All
With the days of easy oil having passed and world energy demand rising as Asian economies and industries grow the balance between energy demand and supply grows ever , more important. This article explores the concept of peak oil, a concept that has been floated around the last few years.
There has been much talk in the past few years about peak oil. While the talk has focused on the supply side, now we have important debates on peak demand too. Is this all hype or is there something to it?
Peak oil people are not extremists. Many are eminent geologists, reservoir engineers, and scientists. They base their theories on the foundation of the work done in the 1960s by King Hubbert. The so-called "Hubbert curve" applied to the United States, correctly predicted the US peak oil production in the 1970s. Peak oil proponents apply the Hubbert curve to the global oil supply. Many argue peak oil has already passed and expect the global oil supply will be less than 85 million b/d within 10 years and will decline further.
Then there are policy peak people, who believe a combination of geology and nationalist policies restricting access to oil resources is resulting in a de facto oil supply peak.
Then there are my fellow economists, many of whom believe that high oil prices result in lower demand and higher supply will then bring the prices down. They believe that it is just a matter of time before oil prices decline dramatically.
Who is right? Let me share my views with you. First, we are indeed running out of oil. Not geologically, but because of limited access to oil resources. We see a policy peak of 95 million b/d (including Iraq) of conventional oil, plus 5-10 percent of non conventional oil. (We are not running out of gas. There is still plenty of gas to be found and produced.)
Second, Non-OPEC oil is already nearing a peak. Within the next 2-3 years, we will be at peak supply within Non-OPEC, after which supplies will remain flat and eventually decline.
Third, peak oil demand has already been reached in OECD countries and there is no possibility of revival of demand.
In short, peak oil demand has already been reached in the industrialized world. Non-OPEC peak supply is imminently upon us. These two peaks are real.
On the other hand, OPEN supplies can still expand, despite certain limits. Demand in the developing counties, especially emerging markets will continue to see growth and giant economies like China and India have great growth prospects ahead of them. So peak supply and peak demand is not a reality in OPEC and the developing world.
Eventually, supply limits will catch up with demand growth sometime in the second half of this decade. Prices will rise as supply limits work their way through and high oil prices of US$150-$200 per barrel will be reached which will, in turn, reduce demand. The biggest drop in demand may come in the United States and could result in a substantial drop of several million barrels per day, mainly in the gasoline market. Lower demand results in lower prices, say, US$70-$100/barrel range. The lower demand in the United States will provide room for countries like China and India to grow in a world of limited physical supply outlook.
Economists are blamed for many wrong forecasts. The problem is that any forecast requires a forecast of GDP growth. GDP growth forecasts come from the IMF (and others) and their long-term GDP growth forecasts are often times less reliable than oil price forecasts. Economists depend heavily on assumptions of GDP forecasts which, in reality, are purely guesses!
Oil demand forecasting is easy if you have a GDP estimate to use. Many economists in the private sector and international organizations use GDP assumptions to forecast increasing oil demand. GDP growth rates are always positive, so the demand goes up and up forever!
But there is one unchangeable reality: If there is no supply, there can be no demand.
Those who forecast demand, more often than not, do not concern themselves with supply issues. Indeed, most demand forecasters know little, if anything, about supply. We must take to task every oil demand forecast if the forecaster cannot show us where the supply comes from. If the supply requirements are much more than 95-100 million b/d of oil, we must question the wisdom of such forecasts.
One of the most common problems is demand forecasting in China. Often, demand forecasts show never ending demand growth for China because of their expected large and continuous GDP growth rate. It is true that China, like India, will consume more oil but we are often asked, "What happens if every person in China drives a car?" Our answer is, "The people in the US and Europe will have to walk." There is not enough oil in the world to support every Chinese driving a car!
One of the consulting companies has recently come up with an unrealistically high demand growth for China over 10 years. The forecast is misleading. While China is already the third largest gasoline exporter in Asia, their study concluded that China will be short of refining even with their massive expansion programs. These kinds of forecasts, pointing not only a need for more refining but also more tankers, pipelines, storage facilities, etc., in China beyond what has already been planned , are all based on the assumption that demand keeps increasing with no limits and supply is not an issue! This does a disservice to the industry and hurts potential investors.
We need to train ourselves to think of supply and demand in an interactive fashion. Higher oil prices result in lower demand. It is not possible to forecast energy demand in an emerging market in the same manner as it has happened in OECD countries. A new path has to be found. So let us take all of the every-growing demand forecasts with a pinch of salt. Again, we emphasize that if there is no supply, there can be no demand.
Article from Dr. Fereidun Fesharaki, Charman of FACTS Global Energy.
Peak Oil: Peak Oil Supply or Peak Oil Demand? Is There Something to it All
With the days of easy oil having passed and world energy demand rising as Asian economies and industries grow the balance between energy demand and supply grows ever , more important. This article explores the concept of peak oil, a concept that has been floated around the last few years.
There has been much talk in the past few years about peak oil. While the talk has focused on the supply side, now we have important debates on peak demand too. Is this all hype or is there something to it?
Peak oil people are not extremists. Many are eminent geologists, reservoir engineers, and scientists. They base their theories on the foundation of the work done in the 1960s by King Hubbert. The so-called "Hubbert curve" applied to the United States, correctly predicted the US peak oil production in the 1970s. Peak oil proponents apply the Hubbert curve to the global oil supply. Many argue peak oil has already passed and expect the global oil supply will be less than 85 million b/d within 10 years and will decline further.
Then there are policy peak people, who believe a combination of geology and nationalist policies restricting access to oil resources is resulting in a de facto oil supply peak.
Then there are my fellow economists, many of whom believe that high oil prices result in lower demand and higher supply will then bring the prices down. They believe that it is just a matter of time before oil prices decline dramatically.
Who is right? Let me share my views with you. First, we are indeed running out of oil. Not geologically, but because of limited access to oil resources. We see a policy peak of 95 million b/d (including Iraq) of conventional oil, plus 5-10 percent of non conventional oil. (We are not running out of gas. There is still plenty of gas to be found and produced.)
Second, Non-OPEC oil is already nearing a peak. Within the next 2-3 years, we will be at peak supply within Non-OPEC, after which supplies will remain flat and eventually decline.
Third, peak oil demand has already been reached in OECD countries and there is no possibility of revival of demand.
In short, peak oil demand has already been reached in the industrialized world. Non-OPEC peak supply is imminently upon us. These two peaks are real.
On the other hand, OPEN supplies can still expand, despite certain limits. Demand in the developing counties, especially emerging markets will continue to see growth and giant economies like China and India have great growth prospects ahead of them. So peak supply and peak demand is not a reality in OPEC and the developing world.
Eventually, supply limits will catch up with demand growth sometime in the second half of this decade. Prices will rise as supply limits work their way through and high oil prices of US$150-$200 per barrel will be reached which will, in turn, reduce demand. The biggest drop in demand may come in the United States and could result in a substantial drop of several million barrels per day, mainly in the gasoline market. Lower demand results in lower prices, say, US$70-$100/barrel range. The lower demand in the United States will provide room for countries like China and India to grow in a world of limited physical supply outlook.
Economists are blamed for many wrong forecasts. The problem is that any forecast requires a forecast of GDP growth. GDP growth forecasts come from the IMF (and others) and their long-term GDP growth forecasts are often times less reliable than oil price forecasts. Economists depend heavily on assumptions of GDP forecasts which, in reality, are purely guesses!
Oil demand forecasting is easy if you have a GDP estimate to use. Many economists in the private sector and international organizations use GDP assumptions to forecast increasing oil demand. GDP growth rates are always positive, so the demand goes up and up forever!
But there is one unchangeable reality: If there is no supply, there can be no demand.
Those who forecast demand, more often than not, do not concern themselves with supply issues. Indeed, most demand forecasters know little, if anything, about supply. We must take to task every oil demand forecast if the forecaster cannot show us where the supply comes from. If the supply requirements are much more than 95-100 million b/d of oil, we must question the wisdom of such forecasts.
One of the most common problems is demand forecasting in China. Often, demand forecasts show never ending demand growth for China because of their expected large and continuous GDP growth rate. It is true that China, like India, will consume more oil but we are often asked, "What happens if every person in China drives a car?" Our answer is, "The people in the US and Europe will have to walk." There is not enough oil in the world to support every Chinese driving a car!
One of the consulting companies has recently come up with an unrealistically high demand growth for China over 10 years. The forecast is misleading. While China is already the third largest gasoline exporter in Asia, their study concluded that China will be short of refining even with their massive expansion programs. These kinds of forecasts, pointing not only a need for more refining but also more tankers, pipelines, storage facilities, etc., in China beyond what has already been planned , are all based on the assumption that demand keeps increasing with no limits and supply is not an issue! This does a disservice to the industry and hurts potential investors.
We need to train ourselves to think of supply and demand in an interactive fashion. Higher oil prices result in lower demand. It is not possible to forecast energy demand in an emerging market in the same manner as it has happened in OECD countries. A new path has to be found. So let us take all of the every-growing demand forecasts with a pinch of salt. Again, we emphasize that if there is no supply, there can be no demand.
Article from Dr. Fereidun Fesharaki, Charman of FACTS Global Energy.
