Peak demand: The cornucopians reach for a fig leaf

The world's oil supply optimists must feel as if they are in that dream that so many of us have had about arriving at work in our underwear. Oops! What do I do now to save face?

Over the past decade oil optimists repeatedly forecast a glut in oil supplies that kept failing to materialize. Now, they are reaching for a fig leaf hoping no one will remember their consistently errant predictions. That fig leaf is the idea that we have reached peak demand, and that that's the reason we have not seen oil production rise in the past several years.

Strangely, they made no mention of this theory in 2005, 2006, 2007 or 2008 as prices skyrocketed. It was only after the market crashed and a deep worldwide recession ensued--something which would be expected to curtail oil demand--that they formulated the peak demand thesis.

Archcornucopian Daniel Yergin, who kept calling for mushrooming oil supplies throughout the last decade, now tells us that flat production is really the consequence of peak oil demand. Developed nations will from this day forward require no greater quantities of oil. He does acknowledge that demand may grow in China in the years to come. His firm, Cambridge Energy Research Associates (CERA), is on record suggesting that oil production capacity will likely grow 25 percent from now through 2030. But the forecast is later hedged with this statement:

“So much will happen between now and 2030 to affect demand—from changes in the automobile engine and the electric battery to changes in demographics and values,” says [CERA senior director Peter] Jackson. “Peak demand may ultimately prove to be the main driver of long-term supply.”

The International Energy Agency (IEA) has also jumped on the peak demand bandwagon. Fatih Birol, chief economist for the IEA, told Reuters, "When we look at the OECD countries--the U.S., Europe and Japan--I think the level of demand that we have seen in 2006 and 2007, we will never see again." To be fair Birol has been sounding the alarm about oil dependence and suggesting that the world "leave oil before it leaves us." And, he has indicated that peak might come as early as 2020. Perhaps Birol is hedging his bets even further sensing that production may rise little if any from here.

A recent entrant into the peak demand sweepstakes is Saudi Arabia. Always publicly confident about its ability to produce vastly more oil for decades to come, it is noteworthy that the desert kingdom is now announcing that peak demand may be here. This comes not too long after the country announced plans to use carbon dioxide injection in the world's most prolific oilfield, Ghawar. The Saudis insist they are doing this as a public service to help spread the technology of carbon sequestration. But this type of injection is only used in fields that are in decline and for which other methods such as waterflooding are no longer sufficient to maintain production. If world demand can be said to have peaked, then perhaps the Saudis will have a perpetual excuse for why they aren't producing more oil--not because they can't, but because the world doesn't demand it.

One has only to make a superficial analysis of such claims to see that they amount to nothing more than sleight of hand. First, every economist knows that supply and demand are always equal and that it is price that makes them so. Ergo, technically speaking if demand has peaked so has supply. It is a tacit admission that peak oil is upon us.

Now, if what these people mean is that oil supply capacity could grow, but won't because we won't need it, then one must ask the complicated question of why people won't need it. Is it because the economy has been so decimated by a debt-fueled crash aggravated by high oil and other resource prices that it cannot grow? Is it simply because people across the globe on average don't feel that they need to use more oil despite the fact that population continues to grow?

Some claim that energy efficiency and the growing production of alternative fuels will depress oil demand. But no one was saying this before the crash. Why has it suddenly become relevant? Did we just discover energy efficiency and alternative fuels?

It is a truism that no one knows whether the world has reached peak oil or will reach it soon. We'll only know many years after it occurs. But the rush to announce that peak demand has arrived seems to be nothing more than an attempt to put a happy face on peak oil.

No matter what the reason, if world oil production has peaked, we are all in serious trouble. Peak means decline won't be very far away. Peak means economic recovery, let alone robust growth, may be all but impossible. Of course, we could try to run the world economy on other fuels such as natural gas and coal. But we have not prepared our infrastructure to do so, and such preparations are measured in decades, not years. Besides, there are serious questions about the longevity of these fuels as well, especially if we vastly ramp up their consumption.

The announcement of peak demand then is really designed to allow all those who made faulty oil production forecasts to keep selling their sunny optimism about future energy supplies while covering their asses for when the verdict on peak finally comes in. What the purveyors of the peak demand thesis really need to do is find some clothes to put on over their dream-time underwear and get to work figuring out where they went wrong in their analyses of oil supplies.