Are We Sleepwalking Into The Next Oil Crisis?

As the world entertains scenarios of peak oil demand based on the rise of electric vehicles, many agencies are warning that the far greater threat of an oil supply crunch looms.

One school of thought is that future oil demand is set to decline because consumers will have better options. Many in this “peak demand” camp believe that the growth of electric vehicles will soon make oil obsolete.

That’s a relatively painless view of the future and is consistent with much of our past experience. Old technologies are frequently replaced by newer, better, and cheaper technologies.

I have written previously on why I don’t believe this version of future oil demand will unfold anytime soon. In a nutshell, if you “do the math,” it becomes clear that it will be years before EVs can take a meaningful bite out of oil demand.

Meanwhile, some organizations are sounding the alarm that rather than a peak demand scenario, we may soon face a peak supply scenario. Or at the least, the loss of global excess spare capacity. The last time this happened, oil prices rose above $100 a barrel.

Words of Warning

In January 2017, Saudi Arabia’s energy minister Khalid A. Al-Falih warned CNBC that he foresaw a risk of oil shortages by 2020:

“I believe if the investment flows that we have seen the last two or three years continue in the next two or three years, we will have a shortage of oil supply by 2020. We know, from what we have seen in the last couple of years, that prices around the current level and below are not attracting enough investment. We know the level of natural decline that existing production is undergoing, and we know that demand is picking up at 1.2 to 1.5 million barrels a year. So between increase in demand and natural decline, we need millions of barrels every year to be brought to the market, which requires massive investment.”

In March 2017, the International Energy Agency published its market analysis and forecast report, Oil 2017. In the report, the IEA warned that the global investment slump of 2015 and 2016 already poses a risk to future oil supplies and that 2017 global spending didn’t look encouraging. Oil supplies are growing in the U.S., Canada, and a few other places around the world, but the IEA report concluded that this growth could stall by 2020 if spending doesn’t pick up.

The report projects that if current trends continue, spare production capacity in 2022 will fall to the lowest level since 2008 (when oil prices nearly reached $150/BBL). On the topic of EVs, the IEA estimated they will only displace small amounts of transportation fuel by 2022. Further, the IEA said that it doesn’t foresee peak oil demand anytime soon.

Halliburton, the world’s largest hydraulic fracturing service provider, reiterated the IEA’s forecast last summer at the World Petroleum Congress in Istanbul. Mark Richard, a Senior Vice President with the company, said that the $2 trillion in spending cuts in the global oil industry over the past few years would impact the price of oil around 2020. Richard added, “Sooner or later, the market is going to catch up. You’ll see some kind of spike in the price of oil. Maybe somewhere around 2020-2021, but it’s got to catch up sooner or later.”

The British multinational bank HSBC gave similar warnings in its Peak Oil Report 2017. The report noted that the oil market is currently adequately supplied, but spare production capacity could soon shrink to just 1% of global supply, bringing the risk of disruption and the subsequent volatility back to the oil markets. HSBC noted that oil demand continues to grow at more than one million BPD every year, and they didn’t see a peak demand scenario before 2040.

5 thoughts on “Are We Sleepwalking Into The Next Oil Crisis?”

  1. Based on all the doom and gloom from the Peak Oilers a few years ago, how could we be sleepwalking? Some of which you were involved in. Granted you were not as silly as the rest of them–there are some total loons there, so don’t pat yourself too much given the comparable. But you still had the wrong instincts on US and World oil production.

    Well, at least you’ve learned your lesson on predicting systemic higher natgas prices! Remember, nothing stops the shale train!

    https://www.youtube.com/watch?v=OyabiLNfjQw

    [OK, the Saudis can crash the price. But it ain’t stopping because of peaker resource exhaustion, regardless of high prices, as the TODsters and ASPOers advocated 10 years ago.]

    1. Oil peakers made serious mistakes, but there were ways they were mostly right. For one thing, the conventional way of producing oil in 1950 and the frequency of oil booms was pretty much ending by 2005. Lucky us that some enterprising oil producers developed the fracking method and that the price of oil was high enough to keep oil going until their methods improved. That’s definitely one for American free enterprise (and fracking may have kept us out of a major depression). It’s fortunate that fracking methods improved so much that oil producers using fracking could make a profit even at $47/barrel (well, sometimes workers had to be paid a little less, but never mind. Methods improved).

      Peakers are still around, myself included, but I know better now. It’s not easy to make predictions.

      The biggest threat to oil is clean tech and the growing international irritation with global warming, which we know we can no longer ignore. I’m not sure how one judges the timetable, but the efficiency and low cost of clean tech will eventually reduce oil’s role in the American economy. Still, experience tells us peakers that people will continue for some time to make money in oil and we have to be circumspect; but many of us are watching the new clean technology and it’s growing fast (and most of it is still first generation, with another one or two generations to go of serious improvements). I can’t predict how fast it will happen but oil will not be a major player 25 years from now. A good clue is that coal in many areas is now a fading business. And natural gas won’t be far behind (then again, maybe not if you’re a European and somewhat susceptible to the charms of Putin (or his threats)).

      Going forward, flexibility will be the key. The U.S. will need realistic flexibility to make a safe transition. We’re no longer fully in control of our destiny. And China is now ready to take advantage of mistakes we’re already beginning to make (though if Europe isn’t careful, it will join us in those mistakes as well).

      1. The global warmers may go the way of the peak oilers. It cannot be proven that temps today are any higher than during the 1930’s and they may be lower. Temps in the Little Ice Age that ended ~1850s were much cooler and were detrimental to agriculture and life in general. It’s definitely cooler now than during the Roman and Minoan warm periods but comparison to the Medieval warm period is still being debated.

        Despite what the mainstream media says, apparent global temperature increases are being driven by “adjustments” and local heat island effects. Antarctic ice is stable or growing and a cyclical nature of the Arctic takes it back to levels last seen in 1974. Sea level rise is not accelerating and in fact its rise is among the slowest since the beginning of this interglacial period, say ~10-12,000 years. What happens to climate in the next 30 years may completely throw AGW into the dustbin of history, and cooling would be negative. The obvious fortune related to resources and technical developments of fracking may apply to coal. Africans hope so at least.

  2. Interesting post.

    It is the old cycle repeated: lower prices, lower investment, higher prices, higher investment.

    Beyond the midterm, the wild card is solid-state batteries. If solid-state batteries work, then the outlook is for long-term decline in oil demand.

    1. President Trump administration is allowing E15 sales for full year. This is great news given the projected supply pinch of petrol. Not so bad that the fuel is usually a dime cheaper per gallon, clean, less polluting, and allows better engine performance.

      Just read the Japanese evaluation of fuel supply and mileage of vehicles. Come to find out we need higher octane fuel. So, again ethanol fits in nice with less expensive fuel and more efficiency. Not bad that the fuel will drop the carbon rating of gas vehicles by a large fraction. Also, we need to supply fuel markets with super premium E30 for next generation vehicles. IEA had ICE still at 58% of light vehicle fleet 2050, so we do need to accomplish better fuel supply.

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