Brent crude is hovering near $50 a barrel, a drop of more than 50% from June 2014 price.
This has happened as a combined effect of various factors which includes the shale oil and oil sands boom in USA and Canada respectively; the huge offshore findings in the SEAL-11 exploration block (brazil), Cameia 1 presalt discovery (Kwanza basin, Angola) among others; and the slow growth of the emerging economies like China and India resulting in lower demand.
The $50 a barrel tag is actually a vital driver for balancing the energy market but the question is when will that equilibrium reach? The high cost supply primarily related to non-OPEC countries is being ousted and there is a projection of decreased demand in the next year (1.8 mb/d to 1.2 mb/d). Add to this the fact that there is a possibility of ease of sanctions which will result in inputs by Iran. All this reflects that the market will have enough supplies at hand through 2016 and beyond. But, is it really about peak supply?
Clearly, world is not running out of oil and now the industry experts say that they believe it’s the demand which is nearing its summit, and not the supply. Ian Taylor, the chief executive of Vitol, world’s largest oil trader forecasted way back in 1980’s that the oil price will rise to $125 a barrel in 2015 as global reserves will be hit by scarcity but now he says that it is highly unlikely that it will reach those numbers again. In the recently concluded the economy energy summit in London, Taylor said that the peak supply concept was becoming a disillusion and he felt that the world will near its peak demand by 2030. He reiterated his notion by saying "I believe we may not see $100 (a barrel) ever again".
The need of higher fuel efficiencies in automobiles and inclination towards alternate and less polluting sources of energy such as gas, biofuels and solar by the industry means that the oil demand is going to be levelled in the coming decade. Adding to this scenario is the UN belief that there should be massive reductions in the usage of fossil fuels to protect the earth from catastrophic climate change.
Peak demand is the next peak oil. Not to say that the overall global consumption would decrease; on the contrary world’s energy consumption is set to soar in the near future helped by increasing global population and developing economies of Asian and African countries. But amidst this energy consumption increase, oil’s share is set to drop from 31% to 26% according to IEA’s 2014 world energy outlook. IEA predicts a modest growth in oil demand till 2040 (0.5% per year) mainly driven by non-OECD countries.
The data from International Energy Agency showing that the global liquid production for the first quarter of 2015 was a surplus 1.85 million barrels per day which is the highest recorded number in a decade or so. Adding to this is the fact that the world consumption has fallen by some 150,000 barrels per day, according to EIA’s short-term energy outlook report.
Eldar Saetre, CEO of Statoil, a Norwegian oil company sees oil demand actually in a decline. He was quoted as saying “You still need a lot of additional (oil) capacity because of natural decline. Overall, we see the same type of combined levels for oil and gas but lower oil and more gas.’’
BP statistical review of world energy 2015 stated that though the consumption of oil globally increased by 0.8% in 2014, it was a little below the average in recent years and significantly weaker as compared to 2013. This was a remarkable change as the oil prices had gone down and if we follow the conventional law of demand, the consumption should have been higher.
All this stabilizes the fact that the demand growth has started showing a decreasing trend and the time is not far when the global demand will eventually hit the ceiling. Below is a chart depicting the projections made by EIA in its Annual energy outlook 2015 report.
" We do believe the aspect that people were set about 25 years ago, which was peak oil, has now clearly gone away. There is a lot of supply of both oil and gas.’’ says Dev Sanyal, BP’s executive vice president, Strategy and Regions. He also says that the concept of peak demand is a big challenge for OECD economies. On the other hand, there are opposing statements too. Philippe Boisseau, the president of new energies at Total says he is not expecting the oil demand to plateau though he believes OECD consumption will most likely decline.
What will happen? How and when will it happen? Only time will tell.
References:
(Bousso, 2015)
(Oil market report, 2015)