Normally tight-lipped Saudi oil minister Ali al-Naimi uttered a revealing remark in Qatar 3 years ago. “Demand will peak way ahead of supply,” he said then. For years, while Americans visualized a future of declining oil supplies, al-Naimi and his fellow Saudis lost sleep worrying about the prospect of fewer customers.
Last week al-Naimi expanded on this theme by saying, “There are those who are trying to reach international agreements to limit the use of fossil fuel, and that will damage the interests of oil producers in the long-term.” In other words, the Saudis don’t like the idea of mitigating climate change by limiting fossil fuel use, lest they get stuck with oil they can’t sell.
Peak oil theory argues that oil is finite, therefore production will peak someday, and then go into irreversible decline, i.e. the life of an oilfield, and of global oil supplies, follows a bell-shaped curve — much like a ball thrown in the air and falling back to earth. In a world of ever-rising demand, peaking supply implies oil shortages and drastically higher prices. But the Saudis don’t see a future of rising demand and prices. They foresee demand declining faster than production, which implies falling prices, as is happening now.
Peak oil’s originator, M. King Hubbert, achieved credibility for his theory by accurately forecasting that U.S. oil production would peak around 1970 and then decline. He didn’t live to see the fracking revolution that reversed the decline and has boosted U.S. oil production by 50% in the last 5 years.
Oil becomes complicated when you start thinking about supply and demand, finiteness, reserves, production curves, and so on. In its early years, the oil industry skimmed off the “easy” oil, and left most of it behind. This was equivalent to picking the low-hanging fruit within arm’s reach off a tree, while leaving the higher branches untouched. When that fruit is gone, you get a ladder and go for the more-difficult-to-reach fruit. This is what has happened in the oil industry over the past 150 years as the most accessible oil was extracted. Today, oil producers go to the arctic, oceans, jungles, and politically unstable regions to find oil. Improving technology and a market willing to pay for higher production costs also enables oil producers to go back to older oilfields for left-behind oil. As the industry has evolved, this process has repeated itself many times. Thus, the oil didn’t run out, and peak oil didn’t come.
But peak demand could very well become a reality, if other energy sources outcompete oil, or consumers move away from oil for non-economic reasons such as climate change. Unlike supply, demand is tied to human willpower, not oil’s physical availability. A concerted push to address climate change could bring about peak demand. Oil consumption also is threatened by increasing energy efficiency and alternative energy. The Saudis aren’t afraid of running out of oil; they’re afraid of running out of customers. This explains why they’ve prioritized keeping market share over keeping prices high. And it also means they’ll likely use their clout on the world stage to hinder climate change activism, alternative energy technologies, and energy conservation in order to stretch out the oil age as long as possible.
(This commentary is derived from a BloombergBusiness article.)