Crude Observations

Peak Crisis?

Another week gone by and another crisis. This time in the United Kingdom. It had something to do with a head of lettuce. Do I care about this much? I don’t know. It’s hard to care about any of these crises that seem to come with such regularity that it seems we should be much more concerned if we were to suddenly find ourselves besieged by weeks of calm.


At any rate, Liz Truss is out, she lasted 4 Scaramucci’s and was bested by greens, just not that kind. Speaking of heads of lettuce, it appears that Boris Johnson may be back in.


But this is the United Kingdom, right? The other side of the pond. Not here. Not even close. So, we shouldn’t care. But we do. Because in addition to being the country where our head of state hangs his crown, it’s also an English-speaking Westminster Parliamentary democracy (like us!) so we get to enjoy all the crazy from a perspective of shared culture and history.


Plus, I have to say, it is interesting to watch a parliamentary system work the way it should, emphatically heaving out underperforming leaders and watching MPs act freely and expressing actual opinions that are critical of (gasp) their own parties and leaders. Canada could learn a lot from that.


A lot of people are seizing on the collapse of the Liz Truss leadership and predicting much of the same for Danielle Smith. I hate to rain on that parade, but I think people need to hold their horses. That isn’t happening. We have an election in 7 months and as colossally awkward the first few weeks of the Smith reign have been, it’s just not as bad, no matter how much we try and convince ourselves of this. I mean, she hasn’t even come close to destroying the energy industry like Liz Truss singlehandedly torpedoed the pound, so she gets more time. Danielle will last to the election and she has a decent chance of going past that. She needs to rein in her crazies, for sure. And maybe scrub her social media history. But let’s be real – she isn’t really comparable to the PM of one of the largest and most important economies and democracies in the world. Plus, she failed to achieve the kiss of death Donald Trump endorsement, like poor old Liz.


Speaking of destroying the energy industry (pivot!), I was recently reading a fascinating article about Saudi Arabia and their spare capacity (hint – they don’t have a lot) and because it used the term Peak Oil, I felt it was as timely an opportunity as ever to revisit some thoughts on Peak Oil.


You all know what Peak Oil is, right?


Peak oil is the theory, first advanced by King Hubbert that the discovery, exploitation and production of that non-renewable resource we all love to hate but can’t live without was going to hit the proverbial peak and inevitable decline because there just weren’t any more big oil deposits left to be found. So prices would spike and force the world to find alternatives.


The problem with Peak Oil is that it failed to take into account unconventional resources such as the oilsands, tight oil and the like and, most tellingly, human ingenuity and our ability to problem solve our way out of scarcity.


But the article I read was actually theorizing that Hubbert’s Peak Oil thesis was playing out perfectly in Saudi Arabia – on a field basis (the actual theory being that once 50% of reserves are produced it’s all downhill from there), thereby explaining the inability of the Kingdom to extend production much past its all-time high of about 11 mm bpd anywhere except in the media and the expectations of the current White House.


Distilled into blog summary form, the thesis is that Saudi Oil reserves are overstated (based on a whole slew of evidence) and that while production can continue for years from mega-fields like Ghawar, the goose is cooked and conventional Saudi production is on the back side of 50%.


This of course raises a whole host of issues for the rest of the world as it regards oil production, opportunity for Canada and underlines just how dumb it is to exhaust Strategic Reserves just to pursue political objectives. The biggest upshot of production limitations in the face of continued demand growth is higher prices, which I have to say I really like – industry and portfolio wise.


At least that’s the way I see it. Some people say it is no problem. These high prices will just accelerate the demise of oil and push everyone that much faster into renewables and accelerate the energy transition. My view is more nuanced – supply constraints without fully flushed out alternatives are harbingers of more chaos in what is going to be a long-term evolution of the energy markets, not some convenient moment in time where demand for oil conveniently peaks at the same time as supply and we all ride a winged unicorn to energy and climate nirvana.


This theory of course is Peak Oil Demand, which is always popular with uninformed media, politicians, analysts and the usual cast of soothsayers. The basic theory is that in an electrifying world, the demand for crude oil and related products is going to hit a peak level at some point in the future (very soon you fossilized fossil fuel loving fossils!) and subsequently decline, mainly driven by switching to EV’s in the transportation sector and decarbonisation as the world seeks to hold back the ravages of climate change. So this time the decline in consumption of oil is driven by fiat and tax, not economics. And of course this is all being aided and abetted by none other than recently celebrated unwitting climate champion Vlad (the impaler) Putin.


At any rate, most analysts that advance this theory seem to have determined that Peal Oil Demand was going to happen in 2035 and that subsequent to that we would see a decline (timeline TBD) in demand for oil. This conveniently dovetails into the timing for many political jurisdictions to have mandated that the sale of new ICE vehicles was to be forbidden (how they do this without a popular vote is beyond me). Some analysts and pundits, who have really partaken in the proverbial Koolaid and live unchallenged in the 280 character universe of Twitter believe that peak demand is already here and post triumphant rationalizations on why the dead and dying energy industry has to pack up its bags and leave so that windmills, solar panels and cars powered by what are basically massive cell phone batteries could have their time in the spotlight along with bicycles.


All very alarming right? Especially for a dinosaur like me. I mean, who wants to work in an industry that even the experts say is going to hit peak demand and eventually disappear? What’s the point? And according to Twitter, and some guy named @Fossilfuelssuck678, the industry may actually already have entered its death spiral. WHY EVEN SHOW UP FOR WORK!!!!!


But hang on a second, 2035 is a long way off. What are we actually looking at anyway? Turns out the people who actually know what they are talking about are a little more sober in their assessment than a sky-falling scenario. Oil demand is expected to continue growing through 2035, driven by China, India and other rapidly growing, rapidly industrializing non-OECD countries while the more mature economies of the OECD such as the United States and Canada and Europe would see the secular declines that modern economies typically experience after the big growth push. Think of it as a massive investment in energy consumption to raise the standard of living followed by rationalization and efficiency improvements.


So 2035 is still in play, not Sunday. Phew, right? Such a relief that I say to myself: “self, that’s a lot of years from now. I plan on being retired by then. If, in theory, Peak Demand is coming, and that remains to be seen, what does that mean for little old me and the energy world?


Well, let’s start with some numbers, because that matters.


Demand for oil globally in 2023 is expected to be north of 100 million barrels a day. That’s a lot. And that represents growth of about 1-2 million bpd from 2022. That’s also a lot. If we assume that demand continues to grow by 1% a year through the theoretical peak, we end up with demand for oil of about 115 million barrels a day in 2035. Let’s further assume that demand after the peak declines in a similarly civilized and predictable manner, let’s say by the same 1% a year. What we end of with is a scenario where by 2052 or some date 30 years from now, the world is consuming the same amount of oil as it is today. Which is still a ginormous amount of oil by the way.


Put another way, meeting only the demand “growth” and subsequent decline over the next 30 years that brings us back to today’s levels of consumption would require about 100 billion barrels of oil in total.


Factor into this the decline rates of various fields around the world (including Saudi Arabia), currently estimated at about 6% or 6 mm barrels a day or, roughly 2 billion barrels a year over that same 30 year period and you are now at about 180 billion barrels of new oil needed to meet the peak demand scenario – ironically, an amount equivalent to ALL of Canada’s oilsands.


Let’s also not lose sight of the fact that the existing baseline production of 100 million barrels per day requires constant investment and upkeep, something which we know has been neglected in recent years globally – meaning that decline rates may in fact be understated.


Anyway, apologies – I didn’t mean for this to segue into another rehash of future production woes. The point I am trying to make is that the demand scenario contemplated in the Peak Oil Demand thesis still requires a mind-boggling amount of oil for the foreseeable future.  Contrary to the views of many in the anti-oil crowd, the term Peak Oil Demand doesn’t mean demand stops on a dime, today. It means that at some time in the fuzzy future, all other things being equal, growth in demand might peak. Are we going to meet all this needed extra capacity by squeezing every last drop out of the oilsands? Not likely. But it has to come from somewhere. That’s the point.


The biggest argument supporting Peak Demand and the one trotted out most often to argue that fossil fuels are a dying industry is the replacement of the transportation fleet with electric vehicles. The basic premise being that since transportation represents about 65% of oil consumption, then it’s really just a simple matter of everyone getting a Tesla and banning internal combustion engines so that oil demand falls off a cliff and the planet is saved – bob’s your uncle.


Never mind the logistical and fiscal nightmare of replacing more than a billion vehicles and tripling the electrical grid and building a charging infrastructure to service all these vehicles, the real fallacy here of course is that the cars and passenger vehicles are only a portion of the consumption of oil – it’s the heavy use vehicles, trucks, boats, airplanes and there is currently no commercially feasible battery-powered solution in place for these. I don’t doubt it will come, but it’s not here and won’t be for a long time, no matter how much we talk about it on social media and crow over a glider powered by solar panels. Not to mention the enormous cost of replacing all this enormous installed base of engines. I don’t know about any of you, but I think an electric Airbus 380 is pretty far off in the future and I will not be the guinea pig for those test flights, that’s for sure! Never mind that the whole premise of flight is to get lighter and lighter and a battery to power that 380 probably weighs more than the current plane itself.


Or, consider the proposed banning of internal combustion engines by certain dates by various countries. Seems like a good idea right? Environmentally responsible, carbon-loving and hip. Might even accelerate Peak Oil demand! But, this is foolish and short-sighted policy on so many levels. Aside from the emptiness and unenforceability of it, first and most likely it punishes domestic industry, second it eliminates choice for consumers and we all know what a great track record government has in selecting winners, third, in the rush to be seen as doing something/anything, the anti-oil bandwagon creates a situation where one policy can cancel out the effectiveness of another. If you already have a robust price on carbon, shouldn’t you let the market determine the best way to maximize efficiency and reduce emissions – isn’t that the point? If we are going to ban these types of vehicles then why bother with a carbon tax? Better yet, if we are going to ban internal combustion engines, why do we need subsidies for electric vehicles?  What about the gas taxes, which have been in place forever, that fund everything from roads to renewable energy. Not to mention internal combustion engines are improving all the time. Hybrids use about 1/3 of the gasoline of a comparably sized non-hybrid. Hydrogen is theoretically on the way. In the meantime, demand for oil keeps growing.


As another example, consider the short sightedness of governments that have no clue how the energy sector works or its size and complexity and who enact legislation or impose onerous regulatory burdens on the energy sector under the guise of “responsibly growing the economy while protecting the environment” that actually accomplish neither. Infrastructure projects don’t get done, product is shipped by alternative means that are either unsafe, not environmentally responsible or over-loaded, prices rise causing economic and affordability issues, supply growth in the region slows and the economic opportunity is lost domestically but seized by other parties who have a much less magnanimous view of the environment and regulation – you know, like Russia. Yet demand for oil keeps growing. And you’ve just in essence handed an even bigger cheque to a despot.


How do the two preceding examples relate to Peak Oil Demand?


Easy – both arise out of a misinformed and narrow world view that if Peak Oil is coming, it must be hurried along with government guidance, having little regard to the complexity of the undertaking or the economic consequences of these decisions. Demand continues to grow – energy is cheap and cheap energy is needed to bring people out of poverty, but meanwhile in fantasy land, we continue to put up all these roadblocks to exploiting a resource that is going to be very much in demand for decades to come, peak or not, because of the staggering reality of how much we already use.


And this is where the Peak Risk of the Peak Demand discussion comes up. Because we have politicians who live inside 2 and 4 year election cycle bubbles and very loud environmental lobbies stifling development at every turn and massive electrification hype and frenzy fed by the media, we are in a situation where people (in general and in positions of power) start to, deliberately or otherwise, misinterpret what Peak Demand actually is. They act like we are already in a declining demand environment and implement policies that may be vote winners but ultimately will only penalize the people that governments are purportedly elected to help.


And while political and career best before dates will be long past before the carnage happens and the accountability IOU’s of these stupid, myopic policies comes due, it is guaranteed that all of them will  their best over the intervening years to cash in on what they’ve set loose. Don’t believe me? Ask Al Gore. Is Greta a millionaire yet?


Reality matters. Given how much oil we need regardless of whether peak oil demand is a thing or not, if we let the fringe and hype take our eye off the ball now on the amount of oil we will need into perpetuity, we are done societally – we are just not ready for an alternative.


Look, 13 years is a lifetime in any industry, nation or government, never mind 30 and things can change – I’m happy to be wrong. But 22 years ago everyone thought the world was going to come to an end because of a date change, iphones didn’t exist, blackberries were a fruit, Beyonce was in a trio and the West Wing was a TV show, not a side show, Donald Trump was a game show host, the UK was relevant and there was no McDonalds on the Champs Elyssées.  But the one constant is that the world thirsts for more and more energy. It did then, it does today and it will in 13, 30 and 50 years, regardless of whether one component sees its demand “peak” after a century and half of continuous growth.


Abundant and cheap energy is a fundamental contributor to our quality of life and we should maintain and develop all the resources we need to ensure the survival of the species – including oil.


Peak oil demand?


Maybe, but let’s all calm down and not saw off the leg of the stool while we are sitting on it.

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