Peak Oil has finally arrived. No really

I have rarely felt more anxiety about writing a column than this one. But here goes: After more than a century of near-constant growth, the world’s appetite for oil is peaking, and will soon enter a terminal decline.

It’s hard to write because those who have called a peak in oil have a forecasting record on par with movie producer Harry Warner’s skepticism that people in the 1920s wanted to see talking pictures.

As far back as 1919, the chief geologist of the US Geological Survey wrote that domestic production – then running at about 960,000 barrels per day, about 6% of today’s levels – would begin to decline within two to five years. In the 2000s, a lack of oil field discoveries led to feverish concern that supplies were running out, before the shale revolution prompted a surprise jump in production. BP Plc predicted in 2020 that consumption of liquid hydrocarbons would at best plateau for 15 years around the 97.9 million barrels per day it hit in 2019, before revising its forecast to a peak between mid- this decade and 2030.

Through it all, oil demand has continued to grow as the indispensable energy carrier fueling rising global incomes and development. Still, the reserves of stamina that crude oil has called upon to maintain its upward trajectory are finally giving way – and US Federal Reserve Chairman Jerome Powell may have just delivered the coup de grace.

Consider what is happening in the financial markets right now. Stocks plunged and bond yields rose sharply after the Fed passed its third straight 75 basis point rate hike and Powell signaled he was willing to send the U.S. economy into recession to bring inflation back to target. A rising dollar has pushed the British pound to record lows, while the yen and euro fell to their lowest levels in two decades or more. One analyst this week claimed there is now a 98% chance of a global recession.

Then consider how close we are to peak oil already. Each forecaster has a different estimate for this number, but the median of 12 looking to a future date is for a peak level of about 103.2 million barrels of liquid fuel per day — something most see occurring some time between mid- ​2020s and mid-2020s. – the 2030s. In contrast to a history in which consumption grew by more than a million daily barrels a year, it’s a modest enough increase that debates about the precise timing of the peak are almost academic. Still, the median measure is just a touch above the levels of about 101.6 million daily barrels that both the International Energy Agency and the US Energy Information Administration expect to see by the end of this year.

Now think what a global recession would do to these prospects. Oil consumption fell by more than 2% from peak to trough after the 1973 oil crisis and the 2008 financial meltdown, with production taking three years to return to previous levels. The drop was closer to 10% during the Covid-19 pandemic and in 1980, when the aftermath of the second oil bust and the Iran-Iraq war collided with the monetary pressure Powell’s predecessor Paul Volcker applied to wipe out the inflation of the previous decade. In each case, consumption didn’t just suffer a temporary bump—the direction of oil demand was permanently set back.

A global recession on the scale that stock and bond markets are now pricing in could easily push liquid fuel consumption back below 100 million barrels until mid-decade. That’s starting to bring things close to the point where most forecasters see long-term shifts in demographics, economic growth and technology sending oil into terminal decline. Crude oil itself accounts for only about 80 million daily barrels of total liquid demand, with most of the rest coming from products derived from gas, plant material and coal.

The condition of the petrol is a foretaste of what is to come. Demand for the fuel, which uses more than a quarter of the world’s crude oil, has already peaked. Part of that is about electric cars—BloombergNEF estimates that they already draw about 1.7 million daily barrels from global consumption. Still, a lot of it is just plain old internal combustion engines sipping less gas. New American cars now drive almost twice as far per gallon, as they did at the beginning of the Obama administration, with light trucks and SUVs increasing efficiency by a more modest 59%.

As older, less efficient cars are phased out of the fleet, scrapyard entropy reduces gasoline demand as fast as EV maker innovation. It is no coincidence that major refiners such as Reliance Industries Ltd. are already looking beyond road transport and reconfiguring their factories to produce jet fuel and petrochemicals instead.

It is not enough for those who paint a rosy future for oil demand to point to historical correlations with economic growth and argue that the pattern will repeat itself. Forecasters’ spreadsheets aside, OPEC’s spare capacity is already thin, and upstream investment is running at little more than half the level the last time crude prices were near $100 a barrel. barrel. The oil industry, which is responsible for supplying additional barrels, is not spending the money to ensure that they appear – and if they don’t, consumption has no prospect of growing.

In the end, it will be central banks that will read raw its last rites. Faced with inflation caused in part by our stubborn inability to produce enough cheap energy to fuel the recovery from Covid-19, they have put the global economy on a Procrustes trough – reducing economic demand until it is weak enough to sit within the limitations of power supply.

It makes the current level of oil production look like a kind of hard cap. Since its emergence as our most crucial commodity more than a century ago, oil has always lived on GDP growth. With the Fed’s plans to push the world economy into a crisis to cure the inflation epidemic, we are about to see it die by the same hand.

More from Bloomberg Opinion:

• We are learning the wrong lesson from the third energy crisis: David Fickling

• In the face of war and pestilence, clean energy continues to grow: Liam Denning

• Saudi Arabia reveals that oil production is close to its ceiling: Javier Blas

This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

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