Global oil markets are changing dramatically. The advent of electric vehicles and the growing pressures to decarbonise the transportation sector means that oil is facing significant competition for the first time within its core source of demand. This has led to considerable focus within the industry and amongst commentators on the prospects for peak oil demand – the recognition that the combined forces of improving efficiency and building pressure to reduce carbon emissions and improve urban air quality is likely to cause oil demand to stop increasing after over 150 years of almost uninterrupted growth. At the same time, the supply side of the oil market is experiencing its own revolution. The advent of US tight oil has fundamentally altered the behaviour of oil markets, introducing a new and flexible source of competitive oil. More generally, the application of new technologies, especially digitalisation in all its various guises, has the potential to unlock huge new reserves of oil over the next 20 to 30 years. The prospect of peak oil demand, combined with increasingly plentiful supplies of oil, has led many commentators to conclude that oil prices are likely to decline inextricably over time. If the demand for oil is drying up and the world is awash with oil, why should oil prices be significantly higher than the cost of extracting the marginal barrel? The days of rationing and scarcity premiums must surely be numbered? These developments are important. Growth in oil demand is likely to slow gradually and eventually peak. And plentiful supplies of oil are likely to alter fundamentally the behaviour of oil producing economies.
However, this paper argues the current focus on the changing nature of the oil market is largely misplaced. Much of the popular debate is centred around when oil demand is likely to peak. A cottage industry of oil executives and industry experts has developed trading guesses of when oil demand will peak: 2025, 2035, 2040? This focus on dating the peak in oil demand seems misguided for at least two reasons. First, no one knows: the range of uncertainty is huge. Small changes in assumptions about the myriad factors determining oil demand, such as GDP growth or the rate of improvement in vehicle efficiency, can generate very different paths. Second, and more importantly, this focus on the expected timing of the peak attaches significance to this point as if once oil stops growing it is likely to trigger a sharp discontinuity in behaviour: oil consumption will start declining dramatically or investment in new oil production will come to an abrupt halt. But this seems very unlikely. Even after oil demand has peaked, the world is likely to consume substantial quantities of oil for many years to come. The comparative advantages of oil as an energy source, particularly its energy density when used in the transport system, means it is unlikely to be materially displaced for many decades. And the natural decline in existing oil production means that significant amounts of investment in new oil production is likely to be required for the foreseeable future. The date at which oil demand is likely to peak is highly uncertain and not particularly interesting. Rather, the importance of ‘peak oil demand’ is that it signals a break from the paradigm that has dominated oil markets over the past few decades.
