So I was reading the other day (yes I do that) about Peak Oil. Remember Peak Oil? That was the theory that the discovery, exploitation and production of that non-renewable resource we all love to hate but can’t live without was going to hit the proverbial peak and inevitable decline because there just weren’t any more big oil deposits left to be found. So prices would spike and force the world to find alternatives.

 

The problem with Peak Oil is that it failed to take into account unconventional resources such as the oilsands, tight oil and the like and, most tellingly, human ingenuity and our ability to problem solve our way out of scarcity.

 

At any rate, the “Peak” never actually arrived and we all know how this played out from 2014 onwards as new supplies of seemingly limitless unconventional reserves swamped the market and dropped prices like a stone. So much for peak oil energy Armageddon.

 

As it happens, that wasn’t the peak oil theory I was reading about. I was reading instead about Peak Oil Demand, which is the current flavour of the day theory with media, analysts and the usual cast of soothsayers. The basic theory is that in an electrifying world, the demand for crude oil and related products is going to hit a peak level at some point in the future (very soon you fossilized fossil fuel loving fossils!) and subsequently decline, mainly driven by switching to EV’s in the transportation sector and decarbonisation as the world seeks to hold back the ravages of climate change. So this time the decline in consumption of oil is driven by fiat and tax, not economics.

 

At any rate, in this particular article, I read that Wood MacKenzie, a highly respected energy consultancy, had determined that Peal Oil Demand was going to happen in 2035 and that subsequent to that we would see a decline (timeline TBD) in demand for oil. Since I was on Twitter, the article also had countless 140 character statements to the effect that peak demand was already here and triumphant rationalizations on why the dead and dying energy industry had to pack up its bags and leave so that windmills, solar panels and cars powered by what are basically massive cell phone batteries could have their time in the spotlight along with bicycles.

 

All very alarming right? I mean, who wants to work in an industry that even the experts say is going to hit peak demand and disappear? What’s the point? And according to Twitter, and some guy named @Fossilfuelssuck678, the industry may actually already have entered its death spiral. WHY EVEN SHOW UP FOR WORK!!!!!

 

But hang on a second, 2035 is a long way off – I was actually planning on being retired then. What are we actually looking at anyway? The Wood Mackenzie people are smart – they aren’t going to run around doing a Chicken Little dance. Turns out they are a little more sober in their assessment than a sky-falling scenario. Driving the growth through 2035 was China, India and other rapidly growing, rapidly industrializing non-OECD countries while the more mature economies of the OECD such as the United States and Canada and Europe would see the secular declines that modern economies typically experience come back after a short growth spike.

 

So 2035 is still in play, not Sunday. Phew, right? Then I said to myself: “self, that’s a lot of years from now. I plan on being retired by then. If, in theory, Peak Demand is coming, and that remains to be seen, what does that mean for little old me and the energy world?

 

Well, let’s start with some numbers, because that matters.

 

Demand for oil in 2017 is expected to grow by 1.6 million barrels a day. That’s a lot. We consume almost 98 million barrels of oil a day globally. That’s also a lot. If we assume that demand continues to grow by 1% a year through the theoretical peak (as Wood Mackenzie does), we end up with demand for oil of about 116 million barrels a day in 2035. Let’s further assume that demand after the peak declines in a similarly civilized and predictable manner, let’s say by the same 1% a year. What we end of with is a scenario where by 2052 or some date 35 years from now, the world is consuming the same amount of oil as it is today. Which is still an enormous amount of oil by the way.

 

Put another way, meeting only the demand “growth” and subsequent decline over the next 35 years that brings us back to today’s levels of consumption would require about 100 billion barrels of oil in total.

 

Factor into this the decline rates of various fields around the world, estimated at about 5% or 5 mm barrels a day or, roughly 2 billion barrels a year over that same 35 year period and you are now at about 178 billion barrels of new oil needed to meet the peak demand scenario – ironically, an amount equivalent to ALL of Canada’s oilsands.

 

Let’s also not lose sight of the fact that existing baseline production of 98 million barrels per day requires constant investment and upkeep, something which has been neglected in recent years globally – our glut legacy –meaning that decline rates may in fact be understated.

 

Anyway, apologies – I didn’t mean for this to segue into another rehash of future production woes. The point I am trying to make is that the demand scenario contemplated in the Peak Oil demand thesis still requires a mind-boggling amount of oil for the foreseeable future.  Contrary to the views of many in the anti-oil crowd, the term Peak Oil Demand doesn’t mean demand stops on a dime, today. It means that at some time in the fuzzy future, all other things being equal, growth in demand might peak. Are we going to meet all this needed extra capacity by squeezing every last drop out of the oilsands? Not likely. But it has to come from somewhere. That’s the point.

 

The biggest argument supporting Peak Demand and the one trotted out most often to argue that fossil fuels are a dying industry is the replacement of the transportation fleet with electric vehicles. The basic premise being that since transportation represents about 65% of oil consumption, then it’s really just a simple matter of everyone getting a Tesla and banning internal combustion engines, oil demand falls off the cliff and the planet is saved – bob’s your uncle.

 

Never mind the logistical and fiscal nightmare of replacing more than a billion vehicles and building a charging infrastructure the real fallacy here of course is that the cars and passenger vehicles are only a portion of the consumption of oil – it’s the heavy use vehicles, trucks, boats, airplanes and there is currently no commercially feasible battery-powered solution in place for these. I don’t doubt it will come, but it’s not here and won’t be for a long time, no matter how much we talk about it on social media and crow over a glider powered by solar panels. Not to mention the enormous cost of replacing all this enormous installed base of engines. I don’t know about any of you, but I think an electric Airbus 380 is pretty far off in the future and I will not be the guinea pig for those test flights, that’s for sure!

 

The problem with the spin doctors and enviro-prophets who preach and propagate this line of thought is that they end up making easily influenced leaders chase bad policy.

 

A couple of examples.

 

Consider the proposed banning of internal combustion engines by certain dates by various countries. Seems like a good idea right? Environmentally responsible, carbon-loving and hip. Might even accelerate Peak Oil demand! But, this is foolish and short-sighted policy on so many levels. Aside from the emptiness and unenforceability of it, first and most likely it punishes domestic industry, second it eliminates choice for consumers and we all know what a great track record government has in selecting winners, third, in the rush to be seen as doing something/anything, the anti-oil bandwagon creates a situation where one policy can cancel out the effectiveness of another. If you already have a robust price on carbon, shouldn’t you let the market determine the best way to maximize efficiency and reduce emissions – isn’t that the point? If we are going to ban these types of vehicles then why bother with a carbon tax? Better yet, if we are going to ban internal combustion engines, why do we need subsidies for electric vehicles?  What about the gas taxes, which have been in place forever, that fund everything from roads to renewable energy. Not to mention internal combustion engines are improving all the time. Hybrids use about 1/3 of the gasoline of a comparably sized non-hybrid. Hydrogen batteries are on the way. How do we even know that the current EV incarnation is going to be the standard. First to market, yes, but so was Beta. In the meantime, demand for oil keeps growing.

 

As another example, consider the short sightedness of governments that have no clue how the energy sector works or its size and complexity and who enact legislation or impose regulatory burdens on the energy sector under the guise of “responsibly growing the economy while protecting the environment” that actually accomplish neither. Infrastructure projects don’t get done, product is shipped by alternative means that are either unsafe, not environmentally responsible or over-loaded, supply growth in the region slows and the economic opportunity is lost domestically but seized by other parties who have a much less magnanimous view of the environment and regulation. Yet demand for oil keeps growing. And you’ve just in essence handed a cheque to a despot.

 

How do the two preceding examples relate to Peak Oil Demand?

 

Easy – both arise out of a misinformed and narrow world view that if Peak Oil is coming, it must be hurried along with government guidance, having little regard to the complexity of the undertaking or the economic consequences of these decisions. Demand continues to grow – energy is cheap and cheap energy is needed to bring people out of poverty, but meanwhile in fantasy land, we continue to put up all these roadblocks to exploiting a resource that is going to be very much in demand for decades to come, peak or not, because of the staggering reality of how much we already use.

 

And this is where the Peak Risk of the Peak Demand discussion comes up. Because we have politicians who live inside 2 and 4 year election cycle bubbles and very loud environmental lobbies stifling development at every turn and massive electric vehicle hype and frenzy fed by the media, we are in a situation where people (in general and in positions of power) start to, deliberately or otherwise, misinterpret what Peak Demand actually is. They act like we are already in a declining demand environment and implement policies that may be vote winners but ultimately will only penalize the people that governments are purportedly elected to help. Peak Oil demand is cover.

 

Why build a pipeline if we are coming up on peak demand, no one will be using any oil in 10 years.

 

Leave it in the ground – oil is a stranded asset, just write it off.

 

Fossil fuels are a dying industry.

 

These are all the positions that are emboldened by a confused discussion of what Peak Oil Demand may or may not be. We hear it all, but the reality is different. Given how much oil we need regardless of whether peak oil demand is a thing or not, if we let the fringe and hype make us take our eye off the ball now on exploration and production and the amount of oil we need, we are done societally – we are just not ready for an alternative.

 

Look, 17 years is a lifetime in any industry, never mind 35 and things can change – I’m happy to be wrong. But 17 years ago everyone thought the world was going to come to an end because of a date change, iphones didn’t exist, blackberries were a fruit, Beyonce as in a trio and the West Wing was a TV show, not a side show.  But the one constant is that the world thirsts for more and more energy. It did then, it does today and it will in 17, 35 and 50 years, regardless of whether one component sees its demand “peak” after a century and half of continuous growth.

 

Abundant and cheap energy is the fundamental contributor to our quality of life and we should maintain and develop all the resources we need to ensure the survival of the species – including oil. Peak oil demand or not, we consume it and will for decades to come in quantities too massive to actually comprehend. “Oil” is not a sunset industry so let’s not saw off the leg of the stool while we are sitting on it.

 

Peak Oil Demand? Maybe. But right now? It’s so far off it may as well not exist.

 

Prices as at October 20, 2017 (October 13, 2017)

• The price of oil fell during the week as markets resumed worrying about inventory before rallying at the end of the week due to a bit of geopolitical risk and rig count
  • Storage posted a surprise decrease
  • Production fell
  • The rig count in the US declined
• Natural gas fell during the week

 

• WTI Crude: $51.47 ($51.35)
• Nymex Gas: $2.900 ($2.991)
• US/Canadian Dollar: $0.7925 ($ 0.8014)

Highlights

• As at October 13, 2017, US crude oil supplies were at 456.5 million barrels, a decrease of 5.7 million barrels from the previous week and 12.2 million barrels below last year.
  • The number of days oil supply in storage was 28.6 behind last year’s 29.6.
  • Production was down for the week by 1,074,000 barrels a day at 8.406 million barrels per day. Production last year at the same time was 8.464 million barrels per day. The change in production this week came from an increase in Alaska deliveries and dramatically lower Lower 48 production due to hurricane related shut-ins.
  • Imports fell from 7.617 million barrels a day to 7.483 compared to 6.907 million barrels per day last year.
  • Exports from the US rose to 1.798 million barrels a day from 1.270 and 0.439 a year ago
  • Canadian exports to the US were 3.265 million barrels a day, down from 3.442
  • Refinery inputs were down during the week at 15.439 million barrels a day
• As at October 13, 2017, US natural gas in storage was 3.646 billion cubic feet (Bcf), which is 1% lower than the 5-year average and about 5% less than last year’s level, following an implied net injection of 51 Bcf during the report week.
  • Overall U.S. natural gas consumption was flat during the week, as a  decline in electrical demand was offset by gains in industrial and residential
  • Production for the week was up 2%. Imports from Canada were down 3% compared to the week before. Exports to Mexico were up 2%.
  • LNG exports totalled 11.2 Bcf.
• As of October 16 the Canadian rig count was 186, 130 Alberta, 23 BC, 30 Saskatchewan, 3 Manitoba. Rig count for the same period last year was 160.
• US Onshore Oil rig count at October 20 was at 736, 7 less than the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was down 8 at 177.
  • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
• Offshore rig count was unchanged at 20
  • Offshore rig count at January 1, 2015 was 55

• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%

Drillbits

• I just saw an article from CNBC talking about how now that United States is exporting up to 2 million barrels a day of its crude into the global market that they have a much bigger influence on markets and price as a result. They can do this because of the massive amount of imports that Canada sends to the United States every day. So in effect we are subsidizing the growth in US exports by sending virtually all of our exports south. Somehow, someway, Canadian oil needs to make it to the NAFTA negotiation. It’s actually the only lever we have.
• Calgary’s mayoral election was held and Naheed Nenshi was returned to power after a spirited challenge. Nenshi does indeed rub some people the wrong way, but he is a policy demon and there is no denying his track record of accomplishments during his first two terms.
• The Amazon HQ2 bids were submitted on Wednesday. Like most cities in Canada, Calgary tossed its hat in the ring along with pretty much every metro area in North America. That’s a lot of tax breaks on offer.
• Cenovus Energy agreed to sell its Palliser crude oil and natural gas assets in southeastern Alberta to Torxen Energy and Schlumberger for $1.3 billion.
• Trump Watch: There are no real comments for this week as I just don’t know what to say or who to believe.