Why Even Saudi Aramco Is Now Talking About ‘Peak Oil’
(Bloomberg) -- The world is turning its back on oil. But how quickly? Technological advances in renewable energy and electric cars, accelerated by the threat of climate change, could mean the world’s thirst for petroleum tops out sooner than companies such as Exxon Mobil Corp. or Saudi Arabia’s Aramco are banking on. “Peak oil” once signified the concern that supplies would someday run dry; today it means something very different.
1. Why is oil’s future in doubt?
About 60% of oil is used in transportation, which is also where the biggest technical developments are occurring. The rapid rise of electric carmakers such as Tesla Inc. and China’s BYD could be turbocharged by advances in related fields such as self-driving vehicles and ride-hailing apps, which make it possible for people to switch from owning cars to relying on rides from more efficient fleets. The culmination of these trends could transform how people travel and prompt more revisions to forecasts for when oil consumption will peak. Even Aramco, which used to downplay the prospect of peak oil demand, cited it as a risk factor in the prospectus for its 2019 initial public offering.
2. Is the world running out of oil?
No. The peak oil that’s talked about today is quite different from the concept that emerged in the 1950s, when M. King Hubbert, a Royal Dutch Shell Plc geologist, predicted that U.S. oil production would crest in the 1970s and the world would physically run out of oil. That hasn’t happened, and new discoveries and efficiency gains at existing fields mean oil supplies will abound for a long time to come. So the discussion has shifted to peak demand -- whether people will simply use less petroleum, and reserves that are considered valuable today will wind up being left in the ground.
3. What do experts say about that?
Forecasts for long-term oil demand have been coming down. The International Energy Agency, which advises countries on policies, now expects that consumption will hit a plateau around 2030 amid the use of more efficient car engines and electric vehicles. Renewable energy is taking off, electric companies are switching to cleaner-burning natural gas, and the cost of solar power has fallen 50% in a decade. That’s upending the business model of utilities, which were designed to deliver fossil-fuel energy from large power plants to homes and businesses.
4. Does it matter when oil peaks?
Yes. To limit global warming to “well below” 2 degrees Celsius (3.6 degrees Fahrenheit) -- the target set by the United Nations-sponsored Paris climate change treaty -- the IEA predicts that demand for oil would need to peak in the next few years and then decline sharply. That’s unlikely to happen: The agency’s main demand scenario still sees oil use expanding until the end of the next decade.
5. So when will demand for oil peak?
There’s a range of about 20 years between the earliest and latest predictions. The most aggressive ones are based on the rapid expansion of electric vehicles, energy efficiency improvements and policy changes to curb greenhouse gas emissions. That scenario led Equinor ASA and some forecasters to predict oil demand could peak as soon as the late 2020s. Ben van Beurden, Shell’s chief executive, said in 2017 that if electric cars become really popular, the zenith could arrive in the next 15 years. And legendary oil trader Andy Hall affirmed in November 2019 that the peak could come as soon as 2030.
6. Do all oil companies have the same view?
No. Many see a peak around 2040. Others, including Exxon Mobil and Aramco, say their industry will enjoy decades of growth as it feeds the energy needs of the world’s expanding middle class. But state-owned Saudi Aramco, citing external research from IHS Markit, also acknowledged the possibility of a peak within the next two decades in the prospectus for its IPO, which was expected to be the largest in history. OPEC, the cartel dominated by Middle East producers, projects that consumption will continue to increase for at least another two decades. And when the need for oil does peak, it’s likely to plateau rather than fall steeply.
7. Why such differences in forecasting?
There’s a lively debate about how rapidly electric vehicles will catch on. Falling costs for batteries could make them as affordable as internal combustion engine cars over the next 10 years, according to Bloomberg New Energy Finance. Meanwhile, some of the world’s largest auto markets plan to phase out vehicles powered by fossil fuels to clean up dirty air. In 2017, India pledged that all new car sales there would be electric only by 2030, but has since lowered the target to 30%. China is aiming for 60% electric sales by 2035. France and the U.K. will ban the sale of diesel- and gasoline-fueled cars by 2040. The impact of the U.S. is a wild card because President Donald Trump is disrupting efforts to tackle global warming.
8. What will become of oil companies?
Many are speeding up efforts to diversify, investing more in natural gas and cleaner technologies such as hydrogen fuel cells. These companies also do huge business in non-energy uses of crude, turning it into chemicals used for everything from plastics to fertilizer. Still, peak oil has to be a concern, since it can take a decade or more for multibillion-dollar oil exploration projects to come to fruition. Oil companies risk losing $2.3 trillion in wasted investment if oil demand drops sooner than expected, according to a 2017 report from Carbon Tracker. That’s a problem also sometimes called stranded assets.
9. What will happen to car companies?
They are furiously preparing for the shift. All of the new models launched by Volvo in 2019 were offered in electrified versions, while Volkswagen wants 25% of its sales to be electric by 2025. Daimler and BMW are aiming for 15% to 25% by 2025.
10. What happens to countries that depend on oil revenue?
That’s a big unknown. Peak oil could cause political turmoil in so-called petro-states that rely on oil revenue to keep government finances afloat. Saudi Arabia is partially privatizing Aramco to help fund the diversification of its economy for the post-hydrocarbon age. Other petro-states, such as Russia, Venezuela and Nigeria, have yet to lay out their plans for a future after peak oil.
The Reference Shelf
- QuickTake explainers on electric cars, China’s push to electrify, Saudi Arabia’s diversification and the Aramco IPO.
- The IEA’s forecasts for oil demand.
- Pioneer Natural Resources CEO Scott Sheffield discusses peak oil on Bloomberg TV.
- How electric cars may cause the biggest disruption since the iPhone.
- Seven graphs showing what the demise of oil may look like.
©2019 Bloomberg L.P.