Oil demand could peak as soon as five years from now.
Predicting the point at which the world reaches peak oil demand has become something of a cottage industry. The estimates range, but tend to fall somewhere around 2030 or later. However, two new predictions – just out this week – put peak oil demand as soon as the 2020s, perhaps around 2023, much faster than almost anybody is predicting, not least oil companies and their investors.
A new report from the Carbon Tracker Initiative says that a combination of technology, policy and “necessity” will translate into a peaking of oil demand in the 2020s. By necessity, Carbon Tracker refers to the need to transition to cleaner energy on environmental grounds and the drive to avoid the geopolitical pitfalls of energy dependence. Moreover, the “emerging market leapfrog” ultimately means that oil demand destruction could happen sooner than many people think.
“The motor of change now lies in the emerging markets, which is where all the growth in energy demand lies,” the Carbon Tracker report argues. “They have less fossil fuel legacy infrastructure, rising energy dependency, and are anxious to seize the opportunities of the renewables age. We believe it highly likely therefore that emerging markets will increasingly source their energy demand growth from renewable sources not from fossil fuels.”
The adoption of renewables at such a blistering rate will only be possible because costs continue to fall. Carbon Tracker argues that the rate of adoption for solar PV, wind, batteries and electric vehicles will follow an “s-curve,” referring to a period of slow growth that suddenly morphs into a steep growth curve after it passes a certain threshold.
The rapid adoption of clean technologies will force a peak in fossil fuel demand. “It’s not a scenario; it’s just obvious,” said Kingsmill Bond, new energy strategist and author of the Carbon Tracker report, according to the Wall Street Journal.
Carbon Tracker argues that there are three types of risk stemming from the coming peak: systemic risk to the financial system, country risk to major oil producers, and company risk to entities financially-tethered to fossil fuels. The total estimated value of fossil fuel infrastructure stands at about $25 trillion, the group says.
Also this week, a report from Norwegian risk-management company DNV GL comes to a similar conclusion as Carbon Tracker – that is, peak oil demand will arrive in the next half-decade or so. “The transition is undeniable,” said DNV CEO Remi Eriksen, according to the WSJ.
On the one hand, predicting the peak may not seem important so long as the trajectory in a rough sense is understood – oil consumption will eventually give way to efficiency and electrification. But, the timing of the peak is actually pretty important because even though complete decarbonization is far off into the future, the peak occurs early on in the transition. Carbon Tracker argues that looking at past technology transitions, peak demand tends to occur when the upstart technologies capture only 5 to 10 percent of the market.
More importantly, the period around the peak is when the incumbents start to suffer from the disruption. “Incumbents are typically impacted during the peaking phase because it is then that demand for their products peaks,” Carbon Tracker argued. The important measurement is not total demand, but the change in demand.
In other words, while some skeptics argue that the world will need fossil fuels for decades to come, that misses the importance of hitting the peak. The real pain for the fossil fuel industry comes much sooner. Once the peak is hit, the troubles start to accelerate. Demand starts to fall, so fossil fuel companies face lower prices for their products, lower valuations and ultimately stranded assets. “We should then expect a major reallocation of capital, bankruptcy of companies that are unprepared, and sector restructuring as those who prepared for the shift take over the assets of those that did not,” Carbon Tracker concluded.
Investors are not going to wait for the complete phase out of fossil fuels before they start to redeploy capital and shun fossil fuel investments; that shift occurs much sooner, arguably around the peak.
The U.S. coal industry is a perfect example of this dynamic. Coal miners have gone bankrupt, share prices are in the toilet, and yet coal still accounts for around a third of U.S. electricity. The disruption happened long before the phase out of coal (the U.S. will still be burning coal for years); it happened when demand really started to decline.
The same sort of disruption could start to hit oil and gas companies as soon as the 2020s.