Oil Demand: Have we reached the Tipping Point?
Posted July 1, 2009 at 11:02 am 
Filed in: Economic Security, Energy Demand, Oil Dependence, Oil Prices
This week’s Medium-Term Oil Market Report (MTOMR) by the International Energy Agency (IEA) offered yet another contribution to the heated debate on peak oil demand. In its lower GDP scenario, IEA essentially flat lines global oil demand through 2014—growth between 2010 and 2014 is less than 1 million barrels per day. The report goes on to explain the driving factors behind what it considers the ‘destruction’ of oil demand in industrialized countries, rather than short-term ‘suppression’ which overplays the effects of a decline in oil prices and neglects to consider transportation efficiency improvements. Contributing factors to the peak demand argument include alternative transportation fuels and the shift toward greater energy efficiency.
For a developed world perspective, our friends at ARC Financial recently suggested that 2007 was the peak year of U.S. driving. More broadly, other observers have pointed to global developments, especially in Brazil, Russia, India and China, that they believe are more relevant because they will overwhelm any efficiency gains in OECD countries.
It’s probably too early to know how the global balance will sort out, but a close look at the U.S. shows that peak demand may have indeed arrived. Although historical trends show that economic recovery leads to a return in demand for oil (see this note from the Energy Information Administration), the real question is whether the rebound in demand will be offset by fuel efficiency gains and the use of alternative fuels.
The MTOMR does indeed rely on history to answer this question by examining the relationship between the U.S. transportation fleet, vehicle miles traveled (VMT), and average miles per gallon (AMG). 
A simple equation explains the variations in demand: Transportation Fuel Demand = (Fleet * VMT)/AMG. U.S. data supports this relationship and shows that positive demand has been dependent upon the expansion of fleet and/or VMT remaining higher than any efficiency improvements, or AMG. Considering the latest increase in average fuel economy standards and the push for the electrification of transportation, it’s possible that efficiency advances may change historic trends. However, the less publicized 10-20 percent ‘rebound effect’ could offset such gains (in other words, lowering the per-mile cost of driving may induce people to drive more).
Turning back to the global picture, we offer the following observations:
Assuming that the peak oil demand argument holds water, the idea has major implications for the global oil market and price stability—at least in the medium term. In both its low and high GDP growth scenarios, IEA notes that spare capacity should remain at or above 4 percent of world demand—the point at which markets feel comfortable that any small supply disruptions can be absorbed. In other words, lower demand in the face of existing supply infrastructure and moderate investment in new development could keep markets well supplied over the next 5 years.
Of course, economic growth, geopolitics and the global oil market are all tough variables to nail down over five days, never mind five years!
Oil demand growth has exceeded expectations numerous times in recent history (most recently in 2004 in China and the U.S.). And the economic growth rates of emerging economies in Asia, Latin America and the Middle East will largely determine whether IEA’s economic growth scenarios are realistic. On the supply side, much will depend on how ambitious investment policies are in countries struggling to sustain output.
Previous Post
