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Peak oil = peak demand?


I think it would be a good idea
— Mahatma Gandhi, when asked what he thought of Western Civilization

Captain Renault: I’m shocked, shocked to find that gambling is going on in here!
Croupier: [hands Renault a pile of money] Your winnings, sir.

Captain Renault: [sotto voce] Oh, thank you very much.
Casablanca


Yesterday a news item appeared on the front page of this website with the headline “CERA Official Acknowledges ‘Peak Oil is Here’”. Unfortunately, this report was a little premature.

Speaking at the Center for Strategic & International Studies (CSIS) in Washington DC on 8 June, CERA Global Oil Group Managing Director Jim Burkhard began and ended his talk by stating that “CERA acknowledges that peak oil is here, you heard it from a CERA person.”

[My note: Burkhard spoke at CSIS's Transforming The Transportation Sector: Energy Security, Climate Change And Transportation meeting.]

What could this be about? I looked further, downloading the audio for the meeting (mp3, large file, Burkhard is introduced at 1:14:20). The CERA official began his presentation like this—

[There are] two things I’m going to talk about. One, peak oil and how peak oil has arrived. And two, share an idea about how the low cost electric car, especially in Asia, could be a long-term game changer.

First, peak oil. Peak oil has arrived. We at CERA do believe peak oil has arrived. Some of you who are familiar with CERA’s work may find that surprising. Ah, but not at all. Let me clear up some confusion. You may think I’m talking about peak oil on the supply side, the thought that we’ve reached a geological point where we’ve produced more than half the world’s oil. And we could have a day-long debate on that particular perspective on peak oil, but the peak oil I’m talking about is peak oil in transport fuel demand for light-duty vehicles … peak oil demand in the United States and Europe. We’ve reached it…

Thanks for clearing up my confusion, Jim. For a minute there, things got a little topsy-turvy for me.

What about this “peak demand” view? Like Gandhi’s view of Western Civilization, I think it would be a good idea. If only life were that simple. Here is Burkhard’s sole presentation slide.


Figure 1 — The CERA view of long-term U.S. gasoline demand. “Slower Growth in Fleet Miles and Greater Fleet Efficiency.” This forecast pertains to “light-duty vehicles” only (no long-haul trucks, backhoes, tractors, et.al.).

Burkhard speaks to why CERA expects peak demand for petroleum gasoline in the United States.

One, the biofuels mandates. Two, the lower growth in VMT (vehicle miles traveled). Since 2005 it’s been flat… [VMT declined in 2008 and is declining so far this year] … This is a trend that we haven’t seen in many, many years, and it happened before the depths of the recession…

Another factor is the fuel economy legislation. That’s having a real impact, again it takes time for this to filter through… we don’t change the transportation paradigm overnight. We certainly don’t expect that, but the fuel economy legislation will have a big impact in the long-term.

And lastly the Great Recession is intensifying these trends. We hope that this is a temporary influence… [then he shows Figure 1].

[My note: Burkhard then goes on to say that U.S. gasoline demand (in barrels-per-day) is still larger than China's entire consumption. He also says Europe has reached peak demand. I didn't—couldn't—listen to the whole thing. Mea Culpa.]

These remarks are based on CERA’s report Drivers Turn the Corner in the United States released on June 19, 2008. Oil prices were soaring at the time. Such prices were seen as triggering a long-term shift toward fuel efficiency and reduced driving.

Though the current U.S. economic slowdown explains some of the decline in gasoline demand, long-term shifts in consumer behavior that began as much as two years ago in response to high prices are the key drivers to lower demand.

[My note: I can't read the report without paying for it. It costs the usual 1000 bucks, I suppose.]

After the economic meltdown in 2008:Q3, oil (and gasoline) demand and prices in the United States fell dramatically. Thus in early 2009 a spate of stories appeared proclaiming that peak demand had arrived.

CERA is whistling past the graveyard because it is very likely that we really are in the post-peak oil era (my column, February 19, 2009). The view that non-OPEC production has peaked is now going mainstream (Wall Street Journal, May 4, 2009).

Raymond James notes that non-OPEC oil production apparently peaked in the first quarter of 2007, and given precipitous falls in oil output from Russia to Mexico, there’s not much hope for a recovery. OPEC production—and thus global output—peaked a little later, in the first quarter of 2008, Raymond James says.

Analysts at Barclays and Deutsche Bank, among others, see falling non-OPEC output in future years, but CERA is still holding out, saying they “saw no immediate non-OPEC fall.” (Reuters, April 1, 2009). Reuters also reported that—

Lower oil prices, which have fallen around 65 percent from record highs last July, have put at risk around 7.6 million barrels per day of new planned oil capacity by 2014, [according to CERA].

Lower investment prospects prompted CERA to revise its global oil production capacity outlook to 101.4 million barrels-per-day for 2014, versus a “pre-collapse” forecast last year that capacity would grow to 109 million barrels-per-day by 2014.

Current EIA data puts world oil (all liquids) supply at 83.86 barrels-per-day in May, 2009. OPEC’s crude oil spare capacity is set at 4.34 million barrels-per-day, which yields a total of 88.2 million for world liquids capacity. CERA’s downward revision would thus require the world to add 13.2 million barrels-per-day of capacity between now and 2014.

This outlook might fly in Disney World, but it is clearly impossible in the Real World. This leaves CERA with a public relations problem. Not only must they disavow their fantasy forecasts, but they must also explain away the fact that the oil production will probably never exceed its July, 2008 peak.

CERA must have been thinking really hard in the first half of 2008 about how to spin the fact that global demand was growing but supply could barely rise to meet it. And then it must have come to them like a bolt from the blue—peak demand! This is an ingenious solution. The oil supply doesn’t have to grow anymore because we don’t need it to. World oil production capacity doesn’t matter anyway. We can acknowledge peak oil without acknowledging peak oil.

And so in June, 2008 when things looked bleak for the oil supply, CERA issued its report Drivers Turn the Corner in the United States. CERA knew, as many of us did, that demand would surely collapse with prices over $140/barrel and stay down for a long, long time.

Jim Burkhard’s talk describes the latest version of CERA’s peak demand story. This narrative should hold up over the next few years as actual global demand remains below capacity. Eventually increased oil demand in the emerging BRIC economies (Brazil, Russia, India, China) and the Persian Gulf will overwhelm any efficiency gains achieved in the OECD. Gasoline demand in Japan, the United States and Europe will rise again, but may not reach previous levels. The situation is actually quite complex. Unemployment (and under-employment) will be very high in the United States for some time to come. Japan and Europe are still reeling. And so on.

When CERA’s peak demand story eventually fails, they will need to change their tune again. For now they’ve got some breathing room. Sometime after 2011, when 2007-08 global oil demand levels reappear, CERA will go back to saying that geopolitical “above ground” factors (Chavez’s Bolivarian socialism, chaos in Iraq, unrest in the Niger Delta, under-investment in the Persian Gulf) are holding down the oil supply. They’ve got to blame somebody—what else can they do?

A VERY Brief Rebuttal

You will find a summary of current American oil policies in my Obama Tackles the Liquid Fuels Problem (with many additional links, ASPO-USA, May 28, 2009). This article includes almost all the information you need to evaluate Burkhard’s peak demand story and Figure 1, including an analysis of new CAFE standards and our prospects for oodles of ethanol by 2030. Figure 2 is the only thing I have to add.


Figure 2 — Taken from the Union of Concerned Scientists’ Running Out of Gas. You can see that the rate of growth of gasoline consumption slowed for a while when CAFE standards were first introduced. Consumption then started rising again because 1) greater efficiency makes driving cheaper and 2) standards were not toughened after the mid-1980s. The former is related to Jevons Paradox (i.e. the rebound effect).

Future gasoline consumption in the United States depends on the design & implementation of specific policies affecting it and general economic conditions. There is considerable uncertainty about both. It is not enough to present Figure 1 and tell a simple peak demand story as Burkhard did, but CERA’s real mission is not to make accurate assessments.

Marketing Is Everything

The triumph of sales over substance is nearly complete in the United States. CERA, which is a subsidiary of IHS, Inc., is selling reports at $1000 a pop, consulting services, whatever. Let’s not kid ourselves. To that end, let’s listen in on the IHS, Inc. F408 (Qtr End 11/30/2008) Earnings Call.

Moving now to our consulting business [including IHS CERA], it continues to be soft yet profitable. It accounted for 8% of our fourth quarter revenue and was down 24% organically compared to last year. A slight uptick in the percentage of total revenue represented by our consulting business is reflective of the addition of Global Insight. If you look at just the legacy IHS business and exclude IHS Global Insight, consulting represented 6% of total revenue for Q4…

To be clear we remain committed to our consulting business and we have seen modest improvements in our pipeline at IHS CERA and continue to focus on larger individual consulting opportunities. Lastly as we get into the back half of 2009 we also will have the benefit of more favorable year-over-year comparisons. Finally the remaining product offerings are grouped into the other category.

This category includes events and conferences like CERA Week coming up in February…

[My note: The CERA Week extravaganza in Houston is a product IHS is selling.]

Success in sales depends on telling a happy story and walking the corridors of power. CERA, with its highly visible chairman Daniel Yergin, is adept at both. The peak demand story is a winner. Talking a good game makes all the difference Inside The Beltway.

People concerned with the economic problems attending peak oil—myself included—have labored under the mistaken assumption that winning an argument with CERA about the world’s upstream exploration & production prospects matters. I don’t think it matters at all, at least not as far as CERA and the Powers That Be are concerned. If CERA is making money and telling a good story, and they are, IHS is happy. The peak demand story maintains the status quo, so everybody in our Nation’s Capital is happy too. Win-win.

Of course, this is all lose-lose as far as the rest of us are concerned.

Putting down a loosely organized group of peak oil activists—the phrase “loosely organized” overstates the case—was worth the risk for CERA back in 2006. Peak oil is not good for business.

CERA’s win-win story promotes complacency in the face of an ongoing catastrophe, but in 21st century America such obvious truths seem beside the point. The United States now reflects the CBS TV show Survivor—it’s every man for himself in this game. The current economic crisis didn’t pull us together. We’ve seen that Wall Street will do just about anything to aggrandize itself at Main Street’s expense, and Washington helps them do it.

Having voted myself off the island—or did I get voted off?—some time ago, I can speak freely about what’s happening in the United States. But CERA successfully plays the insider game. CERA may be whistling past the graveyard, but I doubt they care as long as sales are brisk.

I am genuinely sorry that things have come to such a pretty pass in the United States, but that’s just the way it is as far I can see.

Contact the author at dave.aspo@gmail.com

Editorial Notes: June 11, 2009. Updated the article to a newer version at Dave Cohen's request. -BA

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