Obliterating Peak Oil Demand Fears As Energy Transition Realities Set In

The Energy Transition Needs To Transition

The divergence in expected 2028-2030 oil demand between the International Energy Agency's (IEA) recently published Oil 2023 report and its May 2021 Net Zero by 2050 report is staggering. A mere two years ago, the IEA laid out a scenario where oil demand had peaked in 2019 at 100 million b/d and would decline to around 75 mn b/d in 2030. It now projects a remarkable 105 mn b/d of oil demand in 2028. For a sector as large and important as the oil industry, these numbers are not close. Perhaps most notably, we are seeing rising global oil demand at a time of rocky GDP in the three largest oil consuming areas of China, Western Europe, and the United States. As we look at the massive energy needs of the other 7 billion people on Earth that are using just 3 barrels per capita today versus the 13-14 barrels per capita used by the lucky 1 billion of us that live in the United States, Western Europe, Canada, Japan, Australia, and New Zealand, we believe oil demand is likely to continue to grow for the foreseeable future. 

In our view, it's not about being for or against oil or any other energy source for that matter. It's not a close call: the energy needs of the Rest of the World are massive. We will need all forms of energy supply and technologies, in particular many of the newer options like electric vehicles, heat pumps, solar, wind, geothermal, and nuclear, to scale quickly at a low cost in order to help meet the needs. But the idea that we can meet those needs only from the new stuff is pure fantasy. It is not based on reality. We come to these conclusions as analysts, not advocates. 

The use of modern energy is essentially 100% correlated with improved human outcomes. Yes, there are negative externalities related to the environment and a host of other issues that need to be and can be addressed. But the positive externalities that come from using modern energy will be the overwhelming driving motivation of the developing world. We know these positive externalities of modern energy exist because we live in the United States or Canada or Western Europe or Japan or Australia or New Zealand.  

Our final point is that at the end of the day, it is not about the opinion of a US-based energy analyst, or the IEA, or outlooks from major oils, or from the UN Secretary General, or any other western institution, company, policy organization, NGO, or university. It is about the self-determination of the Rest of the World. India will lay out policies it sees as in its best interests, which we expect will include a heavy emphasis on new, low carbon options, but with a pragmatism that recognizes that the country cannot develop without traditional energy as well. The same holds for the 54 countries that comprise the continent of Africa. It is up to each of them individually to decide how they want to develop. The colonial age ended with World War II. Energy self-determination and capitalism combined with sensible regulations to deal with negative externalities is ultimately the key to economic prosperity. All countries and everyone on Earth have the right to energy and economic prosperity. 

The math on Rest of the World energy needs is overwhelming 

In 2022, the aforementioned wealthy countries/regions used about 42 million b/d of oil (liquids) and the Rest of the World used 58 mn b/d. The country of India and continent of Africa, each with 1.3-1.4 billion people (and rising), combined for about 9 million b/d of oil demand, or just over 1 barrel per capita. If those areas were to simply grow to using the 4 barrels per capita that China is on-track to use, we are talking 19 mn b/d of future oil demand growth (Exhibit 1).  

Exhibit 1: Substantial room for oil demand to grow in India and Africa in coming decades

Source: IEA, US Census Bureau, Veriten. 

That upside potential, which would leave all three regions—China, India, and Africa—well below the rich, developed areas in per capita oil use, will likely compare favorably with expected declines in oil demand from the wealthy countries driven by eventual fuel economy gains and demand substitution (e.g., EV penetration). Hence, our expectation that oil demand will grow over the long-run. We recognize that the timing and pace of economic development in India and Africa might be choppy. Like we have seen with global coal demand, there could well be extended periods where oil demand plateaus. 

A few supporting perspectives: 

• The divergence between current per capita energy usage for the developed world versus the developing world is massive. 

• It is inevitable that citizens in the developing world want and will gain modern lifestyles that use modern energy. 

• It is going to take all forms of energy, both traditional fossil fuels and newer technologies and energy sources, to meet incremental demand growth over the remainder of this century.  

• We are highly skeptical that energy needs will be met only with new technologies and renewable energy sources.  

Reconciling the inextricable march toward improved living standards with "Paris-aligned, net zero by 2050" promises 

We are well aware of the pushback that will come from those focused on addressing the "urgent climate crisis." For those of you tired of climate alarmism (which we would guess describes a majority of Super-Spiked and Veriten subscribers), please bear with us (or skip this section) as we are speaking to those that put the possible adverse impacts of climate change atop their list of global concerns. We understand there are some people that sincerely believe the risks from a warming planet outweigh the benefits of economic growth or believe there isn’t a trade-off with economic growth via the (near) exclusive use of renewables and new technologies. 

Our issue with just about all "net zero by 2050" scenarios is that they are not based on any reality that addresses the inextricable march of human progress that comes from using modern energy. We fully agree that there is an urgent need to add new energy sources, to improve energy efficiency, and to develop and scale new technologies and ways of living. We simply do not see the path to doing so without continuing to use rising amounts of crude oil, natural gas, and coal for the foreseeable future. 

It is not about "denying" climate concerns, though we are highly sympathetic to pushing back on obvious climate alarmism. It is about recognizing that citizens in the Rest of the World through self-determination will use whatever forms of energy meet their needs. We believe the most accurate way to describe this is via a hierarchy of energy needs (Exhibit 2): 

• First and foremost, energy needs to be available and reliable 24/7/365 

• Ideally it is inexpensive 

• Preferably it is from domestic sources or dependable allies 

• It leads to cleaner air, cleaner water, and gives consideration to biodiversity protections 

• It is eventually lower carbon in nature 

Exhibit 2: Energy: A hierarchy of needs

Source: Veriten 

There is little chance the developing world will want to exclusively rely on traditional energy sources. It will seek to use electric vehicles (2-, 3- and 4-wheelers), heat pumps, distributed solar, utility-scale solar, wind, nuclear, and every other non-fossil fuel-based energy source or technology. To varying degrees, new energies can be domestically sourced and a CAPEX versus OPEX trade-off may well be worth making for some, if not many. 

But the idea that 7-9 billion people, which happens to be 7X-9X the size of the developed world, will rise the income ladder only using new technologies and renewables within the next 10 or 30 or 50 years is a ridiculous assumption. There is no evidence to support such claims. It is not in any way a realistic scenario. Seriously, this is not a close call.  

Pushback on the inevitability of oil demand growth 

Pushback #1: Fuel economy gains will cause oil demand to plateau within 10 years.  

Answer: We have spent a lot of time discussing this in the past. Changes to the relationship between oil demand and GDP have historically only come after significant increases in the oil price such as the 10X increase in the 1970s and the 5X increase in the 2000s. The SUV-ification of the car park over the past 30 years, especially in the United States, has wiped out the bulk of government-mandated fuel economy gains. There is a question on the degree to which the developing world will demand SUVs as they move up the income ladder. This is an area where developing world policies might choose a different path than what we did in the United States. 

Pushback #2: Electric vehicles are the future! 

Answer: Critical minerals, affordability, grid stability, infrastructure needs, etc., all suggest something well short of the hockey stick projections many assume. Let me be clear, we expect significant growth in EVs, just not the ubiquitous hockey stick adoption by the 2030s. The publisher of Super-Spiked has been a happy EV driver for 8 years now. We are not anti-EV. Rather, we are reality based on our adoption projections. 

Pushback #3: Your view of fossil fuel demand can not come true because it would mean we are way off-track for "Paris-aligned Net Zero by 2050" targets that "The Science" tells us must be met or we will experience the devastating impacts from a warming climate. It's not a world you or anyone will want to live in, so the global fossil fuel demand trajectory must change. 

Answer: We appreciate that some of you sincerely hold those beliefs. We are energy analysts analyzing likely trends in energy demand. It's not about what we wish could happen or what we feel should happen. It is about recognizing that as an American (or European) we have no right to dictate to the Rest of the World how they should develop. The colonial era ended nearly 80 years ago. There is no chance the Rest of the World will not be using rising amounts of oil, natural gas, and coal for the foreseeable future. It is not about what we want or wish. It's about providing available and affordable energy to everyone on Earth, not just the lucky 1 billion of us. 

Pushback #4: But that would result in an unacceptable level of warming. 

Answer: Maybe. Maybe not. But how do you think billions will be lifted out of poverty? There is no reason everyone on Earth shouldn’t have ready access to abundant and affordable modern energy. 

Pushback #5: EVs, solar, wind, heat pumps, efficiency gains, and other new technologies are all great and low cost and can easily replace traditional energy infrastructure if only we had the will. 

Answer: That is a false statement. There is no chance that any of those areas can scale fast enough at a low enough cost with enough reliability to displace traditional energy sources within the next 30 let alone 10 years. 

Pushback #6: You are a markets person that only cares about stock prices and ROCE. The climate can't handle your fossil fuel outlook.  

Answer: Yes, we are mostly Wall Street people by background, but the point of being analysts is to unemotionally forecast future trends. In this role, we are not advocates for or against any particular form of energy. The trends for crude oil, natural gas, and coal all appear to be overwhelmingly in favor of continued growth in global demand. It's an observation based on analysis; it's not a hope or wish per se. 

Pushback #7: So there is no hope on addressing climate concerns?  

Answer: No, that is not what we are saying. In fact, significant progress has been made toward sharply reducing the odds of over 3 degrees of warming. Investments in a wide range of new technologies and energy sources are ramping. Just about all companies, both in the western world and in developing areas, are looking at ways to improve efficiency and decrease the carbon-intensity and impact of their operations or products. There are plenty of policy choices that could move the needle on reducing the growth rate of oil demand relative to GDP. We believe developing countries will be motivated to improve their multiplier of GDP to oil demand by electrifying where possible and possibly trying to reduce the risk of the SUV-ification of their future car parks. The full list is for another post. Our point is that those policies are up to the developing world to formulate. It is not up to us in the United States or Europe to dictate. 

⚡️On a Personal Note: Central Time 

I was recently asked what has been the biggest adjustment in going back to "full-time" work from purely board/advisor positions. I have to say that so far it's been a great decision to join Maynard and team at Veriten and it's gone about as smoothly as is possible. I am very fortunate to be working with such a great group of colleagues and partner companies (i.e., clients)! 

Frankly, the biggest adjustment is that for the first time in my career, I am not working in the headquarters of my employer. And for the first time since 1995, my company is not based in the Eastern Time Zone, or, more accurately, New York Time. Veriten is Houston based, which, I am not 100% sure, I think is around 1 hour behind New York Time. Houston is in something called Central Time. 

Seriously, it's a huge issue, especially as I live in New York Time and have traveled to Houston, Park City, Boulder, and California for Veriten meetings. New York Time is easy: all areas west are either 1, 2, or 3 hours behind. With Central Time, sometimes you add an hour, sometimes you subtract an hour or even two. Who the heck knows? It's madness. Thank goodness for calendar reminder notifications. Making peace with the idea of my life being impacted by Central Time is the biggest un-retirement adjustment I've had to make.  

⚖️ Disclaimer

I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.