Peak Oil Demand and Long-Run Oil Prices
The prospect that global oil demand will gradually slow and eventually peak has created a cottage industry of executives and commentators trying to predict the point at which demand will peak. In this Energy Insight, we argue that this focus seems misplaced. The date at which oil demand will stop growing is highly uncertain and small changes in assumptions can lead to vastly different estimates. More importantly, there is little reason to believe that once it does peak, that oil demand will fall sharply. The world is likely to demand large quantities of oil for many decades to come. Rather, the significance of peak oil is that it signals a shift in paradigm – from an age of (perceived) scarcity to an age of abundance – and with it is likely to herald a shift to a more competitive market environment. This change in paradigm is also likely to pose material challenges for oil producing economies as they try both to ensure that their oil is produced and consumed, and at the same time diversify their economies fit for a world in which they can no longer rely on oil revenues to provide their main source of revenue for the indefinite future. We argue that the extent and pace of this diversification is likely to have an important bearing on oil prices over the next 20 or 30 years. It seems likely that many low-cost producers will delay the pace at which they adopt a more competitive “higher volume, lower price” strategy until they have made material progress in reforming their economies. In particular, in reducing the “social costs” of oil production associated with using oil revenues to finance many other aspects of their economy, such as health care provision or public sector employment. More generally, it seems unlikely that oil prices will stabilise around a level in which many of the world’s major oil producing economies are running large and persistent fiscal deficits. As such, the average level of oil prices over the next few decades is likely to depend more on developments in the social cost of production across the major oil producing economies than on the physical cost of extraction.