The notion of ‘peak demand’ is often invoked to suggest that the US or global economy is somehow less in need of affordable oil today or that Americans are simply finding car ownership passé. But is this really the case? Are we weaning ourselves from dependence on oil? The statistics paint a more nuanced story. It is fair to say that consumption in most of the OECD countries has peaked. In fact, consumption peaked in Germany, France, Italy, Japan and the United Kingdom in 1979—more than 30 years ago. Per capita consumption also peaked in the United States and Canada in 1979, although total consumption has increased as a function of population growth. So, by some measures, peak demand in the advanced economies is nothing new—it occurred more than a generation ago.

Index of Crude Oil Consumption in Selected OECD Countries: 1979 = 100
Source: EIA

However, per capita consumption in the more dynamic economies of the OECD—the United States, Canada and the UK, for example—had remained steady for a generation before 2005, and so total overall consumption in these countries was largely unchanged or growing modestly. Oil was like a utility: demand did not grow much year to year, but volumes were largely dependable. This refutes the notion of peak demand in any meaningful sense for the English speaking countries of the OECD; that is, if peak demand is defined to mean ‘decreasing consumption of oil at constant or lower oil prices’, then this cannot be said to be true of the United States or Canada, at a minimum.

Notwithstanding, both per capita and aggregate oil demand is lower today in all the OECD countries than it was in 2007. This is not primarily the result of demographics or changed tastes. It was directly caused by recession, which we know because demand fell to current levels in less than a year, a period too short for either changing tastes or demographics to have a material impact. At the same time, the collapse of OECD demand was entirely consistent with the oil shocks of 1973 and 1979, during which rapid increases in oil prices drove the US and global economy into recession, leading to rapid and, after 1979, sustained drops in oil consumption.

Index of Crude Oil Consumption

Per Capita Crude Oil Consumption, Selected OECD Countries: 1980 – 2009
Source: EIA, IMF

Whether future oil consumption will be constrained by demand or bounded by supply matters. If it is constrained by demand, as some proponents of peak demand seem to suggest, then oil is presumably plentiful and there is no need to increase production, for example, through offshore drilling on the east or west coast of the US. Nor is there a need to seek substitute fuels like compressed natural gas for use in transportation. We simply don’t want or need as much oil as we did in the past. This does appear to be the case in certain countries, most notably Germany and Japan. Both of these have been characterized by slowly growing economies, aging populations, and even population declines. Thus, a country with a graying population is likely to consume less oil, even at constant fuel prices. But importantly, this is a matter of demographics, not necessarily tastes.

On the other hand, if consumption is constrained by supply, then there is no peak demand in any meaningful sense. Rather, Americans, Japanese and Europeans are simply unable to afford oil and are being priced out of the market as voracious emerging economies bid away the available oil supply in part because some of the latter subsidize the price of fuel. In such a case, if the advanced economies are effectively being starved of energy, then re-starting their economies may prove both more difficult and their recovery more fragile than expected.

Which seems more likely: a lack of desire for oil or a lack of inexpensive supply? In our oil and gas consulting practice, we are already seeing signs of the re-emerging pressures in the oil business. Oil field services capacity–particularly in high-end applications like deepwater offshore and unconventional sources like oil sands—looks to be tightening quite quickly. One manager at a major engineering firm is already noting a looming shortage of engineers. “So, it will be like 2007?” I asked my friend at the firm. “No, he replied. It could be worse. The industry has downsized and deferred capital expenditures over the last two years, so it’s not positioned to respond quickly.”

In short, we need to distinguish between observed oil consumption and inherent demand. If they are the same, then increases in observed demand (consumption) should not be accompanied by notable increases in oil prices, consistent with events since approximately June of last year. Oil consumption has increased, but prices have not shot up, as OPEC has been able to increase production as demand has warranted. On the other hand, if the oil supply is unable to keep up with demand, then inherent demand will be greater than observed demand, and slow growing consumption will be accompanied by heady increases in oil prices—exactly the situation which pertained from late 2004 to H1 2008. During this period, oil consumption increased by 2%, but inherent demand—calculated as a function of GDP, adjusted for efficiency gains—increased by 17%, and oil prices soared.

Where are we today? Given that oil prices seem to be settling in above $80—with nary a story in the media about speculation—the odds would seem to favor peaking supply, rather than peaking demand.

Mr. Kopits heads the New York office of Douglas-Westwood, energy business consultants. The firm assists oil and gas service companies with market research, strategy development and commercial due diligence.

(Note: Commentaries and interview remarks do not necessarily represent the Peak Oil Review’s position; they are personal statements and observations by informed commentators.)

5 thoughts on “Debunking Peak Demand”

  1. There was no talk about speculation before the 2008 blowup either, although it was very clear that investors (speculators) caused the price of oil to zip up to $147/barrel in the summer of 2008. How do we know? Because the price came crashing down just as fast, as investors (speculators) unwound their investments to cover other losses. Speculation (and the dollar) had everything to do with oil prices. And this time is no different. It’s an asset bubble, just like we’ve had every 70 years or so for the last 500 years. Take the ultra-low interest rates we have worldwide, and add a few over-excited investment professionals who are about my age (42), and you can see how lots of borrowed money has flooded the stock and commodity markets yet again, raising prices. There is no shortage of oil anywhere, especially in the U.S. The mature economies may indeed have oil-peaked in terms of demand, but the idea that emerging economies (China) are going to have the cash on hand to buy up more expensive oil, I seriously doubt it. Oil is a self-price-limiting commodity. Higher prices mean less demand means lower prices. Peak demand is nonsense, but peak affordability isn’t.

  2. Peak oil demand? That is a funny concept. If only it even might be true. Oil would need to be far more expensive than it is today, for peak oil demand to be near. And if oil gets that expensive anytime soon, the economy will collapse from demand destruction for everything else. Ten percent unemployment will seem like the good old days, if oil gets that expensive before electric or natural gas powered vehicles become a significant part of the vehicle fleet.
    There are over 6,000,000,000 people on this planet. That number is expected to increase to roughly 9,000,000,000 by 2050. How many of us own automobiles? I have no idea, but you can bet all your money that a whole lot more people want to own one, than actually own one today. Automobiles have given us the most freedom of movement in human history. The vast majority of people who can afford to own a car, will own a car. Living in the rich USA, where even people living in near-poverty own cars, can give us a distorted view of the rest of world. Outside of the developed countries, only a small part of the population can afford to own a car. In China, less than 2% of the 1,300,000,000 people own cars. The 1,000,000,000 Indians like cars too.
    That is why we see new auto plants being opened on a regular basis in China, and elsewhere. Those plants produce a lot of cars. Nearly all of those additional vehicles are powered by oil. We haven’t seen the tip of the iceberg in car ownership on this planet. Most people still live in underdeveloped countries, but many of these countries are now developing fast, as world trade continues the rapid growth that Chinese industrialization, and the invention of the shipping container, helped initiate. They aren’t widening the Panama Canal for nothing.
    The fully developed world of North America, Europe, Japan, Australia, New Zealand, S. Korea, and a few other scattered countries, could never reduce their oil consumption enough to keep world oil consumption from increasing, without going into a permanent state of economic contraction. There are just too many other people out there that want a car, and will soon be rich enough to buy one.
    I wonder how much fuel all those new jets that Airbus and Boeing will sell to China, and the rest of Asia, will burn? Those planes don’t sit on the ground for long. Think how much fuel one jetliner consumes in its’ lifetime. I bet that is one scary number.

  3. Sorry guys, I don’t like such theoretical discussions without integrating some reality checks.

    First of all, the debate about peak demand or peak production is an ideological one. In practice, there are some uses for oil below some price and less economically feasible uses for oil above some price. Looking at price and demand independently or even constructing artificial concepts based on a separations of the two concepts is useless.

    Let us do a reality check:

    the Anglo-Saxon world increasaed oil consumption and we (the Germans together with some Asians) robbed them their industries. So while modern industrialization tends to reduce oil consumption, mind-less consumer nations tend to waste oil when having cheap money at hand. In other words: the Federal Reserve together with simple-minded US politicians “said” to the US consumer: buy everything you can. Don’t care about tomorrow. Be dumb. Nothing matters.

    The conclusion of this is:

    the oil usage increase in the US and in the UK was a result of dumb politics and cheap credit and not of a growing productive base (although credit growth looked like economic growth like it massively did in Q4 of 2009).

    Will that continue? For now? It pretty much looks like because US and UK and Canadian officials don’t seem to be aware of the effect of cheap (dumb) money. My best guess is that this will change if oil prices remain high or when we will experience the next credit-driven oil price peak. Some US senators are already getting some clues that the low Fed rates may have been contributing to the financial crisis.

  4. Scott Benson’s assertion of a 70-year cycle would put the dotcom crash as the successor to the Great Crash of 1929. The 70-year Kondratieff cycle was cited also by some commentators at the time of the Crash of 1987. It’s interesting to see the Oil Crash of 2009 attributed to the same supernatural cause.

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