In 1956, a geophysicist named Marion King Hubbert hypothesized that all rates of oil production follow a bell-shaped curve and will eventually peak and decline. Since then, “peak oil theory” has been the basis of much speculation with an emphasis on global blackouts and catastrophe.
However, there is a growing consensus among the experts that no longer focuses on shrinking supplies but rather shrinking demand for oil. The oil giant, BP, argues 2019 might have been the peak in demand. The 20% reduction in oil demand this year resulting from the global pandemic and economic slowdown may foretell what oil producing and oil consuming nations can expect in the future.
What are the dynamics contributing to predictions of peak demand? Surely, concerns about climate change are a factor. Recently we heard California’s Governor Newsom call for eliminating the sale of gas-powered vehicles by 2035 while India and China pursue similar goals by 2050. In addition, governments around the world are encouraging the development of renewable energy on a massive scale. Less well known are predictions that global population is also likely to peak this century which means there might be fewer consumers worldwide in the decades ahead.
This threat of shrinking demand undermines a strategy that has regulated the oil market for nearly a century: in times of plenty, producers agreed to pump less in order to boost prices for optimal long-term profits. This approach does not make sense, however, if demand consistently falls. When producer nations start to believe their barrels might be stranded in the ground, we can expect them to accelerate production before it’s “too late”. Downward pressure on oil pricing would become inexorable.
Of course, as prices fall, we are likely to see less exploration and reduced investment in production capacity. At best this will only delay the crisis that producing nations must face.
Although there is little consensus on the timing, experts now predict a long-term scramble between rival oil producing nations that will benefit global consumers with declining costs to fill their gas tanks and heat their homes. The next 50 years for the oil market won’t look anything like the last 50 years.