Peak Oil and the Long Descent Down the Mountain

peak in oil demand? And what if it's actually already happened in nine Now that's sort of the nature of a peak is that you don't know that it's happened until you look back and you see that the peak is there and you're on the other side. So that's what we're going to talk about today, whether or not this maybe already happened. Today, we're speaking with David Doherty

on the show. He's an oil demand analyst here at b ANF and Mark Taylor and I talked to him about whether we are or are not on the downhill slide or oil demand. Per our usual disclaimer, BE and the F does not provide investment of strategy advice, and we have a full disclaimer at the end of the show. If you want to read the full New Energy outlook, you can find it at b enof Go, on the Bloomberg terminal at b NF dot com, or on b NF's mobile app. Now, let's talk to David about peak oil. David,

thanks for joining us, Thank you for having me. Always good to have you on the show. So, David, you're here today and you are an oil demand analyst, and we're here to talk about peak oil. Now, I'm going to rewind the clock to you know, version of me and graduate school, young whipper snapper talking about peak oil. And when I think of peak oil, I always think of it as a supply side issue in US having a difficult time actually extracting and becoming increasingly expensive and

therefore we're no longer able to get oil out to everybody. David, what is peak oil from the demand side? Yeah, it's a good question, and it's changed, I guess from when you're talking about and from when I got into the industry as well, and the US found shale technology, advanced old fields could be developed more and supply was basically not a concern anymore. There was enough to go around and enough to meet all of this new demand. The shift between then and now is a bunch of different things.

You know, efficiency gains, consciousness of the environment, and now it's a focus on oil demand speaking, So when will people want to or need to consume less oil that? Obviously that impacts all the way down the value chain. Do you need to take it out of the ground?

How do you consume that? What emissions go out into the world, So totally different to the way we used to think about it and saying is there enough for us to be able to meet our needs versus do we need this much to meet that amount to take it out of the ground. So yeah, completely flipped first is what we would sort of have spoken about this time ten years ago. Is understanding peak important? Is it anything more than an academic exercise or does it allow

you to do anything that you wouldn't do otherwise? The answer is yes and no. Right, if you're taking this stuff out of the ground or extracting it, you want to know when or at what rate you're going to need less of it or people are gonna want less

of it. So obviously, if you're an oil producer, you want to know when people are going to want more or less of your product, right, and when that occurs in terms of environmentalists or people who are concerned about emissions or global warming, oil isn't great obviously in that sense for the environment. So the less that's consumed and the less that's burned at the end of the day and admits less is a good thing for the environment, right, So yes, and know in those senses, when is kind

of the less important part. I would argue whether it's twenty thirty, whether it's I think what we've sort of discovered in the last little while, maybe two three years, is that peak demand is in sight. And in many cases people think peak demand may have even happened. We saw at least in jewel terms, BP this year is saying nineteen might have been the peak for oil demand. Why are they saying that? They've got a bunch of reasons, but hind it. One is we might not recover after COVID.

It's took such a hit this year. We've seen oil deman this year go down almost ten percent, right, so wiping out almost a decade of growth and gains. So, you know, will we get back the levels? I mean, it depends we're you know, working from home here at Bloomberg and YEF, will we go back into the office, will we drive a car if we go into the office, depending on where we are, Will I fly to see

my family next time? Lots of different things, right, Just the way that we live has changed, so they think that might have caused the shift in some of their scenarios. And even when we get back to gains or growing again or quote unquote normality, what does that normality look like? Are we still going to be flying as much? Is it going to be as cheap to fly? Will there even be an airline for us to fly with? You know, those kind of questions totally structural changes will impact the

consumption profile of this product for sure. So David, we could actually just retitle this podcast like ask the expert. You're the expert here today, and you've read a bunch of these different scenarios, and I want to know what is your view? When do you think did the peak already happen or is it outcoming? And you know, I want to make sure I plan to have like give it its momentous occasion, because if it's already happened, and I totally missed it. I'm feeling a little bummed out

about that. When do you think this is going to happen? We are calling a peak first, I mean expert I think is a dangerous term. I think maybe energy or an oil nerd is a good way to phrase it. As the nerd. As the nerd, we look at this every day, and this is kind of our bread and button, and we look at all of the really detailed, boring parts that in general people that want to pay attention to, like, hen many cars are on the road, how will those

cars be driven? Will it be electric or gastine, etcetera, etcetera. So we have been are calling a peak in five again. I think the time range is kind of I don't say irrelevant, but you're seeing three is kind of that time period, depending on who you're talking to, of quote

unquote experts calling peak oil demand. And it really comes down to when they see different technologies overtaking things like internal combustion engine cars, how many people consume plastic wrapping on their food, how quickly the population grows and GDP grows, and so there's a few kind of underlying currents on it. But the fact that the vast majority of forecasters now see this happening even in that fairly wide period of time is different too, if we're going to have this

chat even a year ago. So this came from an exercise BNF does every year called the New Energy Outlook or NEO. Can you explain a bit your methodology how you got to peak? As you mentioned some of the economic undercurrens there, but cow us did you did you arrive at the conclusion of peak? The way that we look at oil, we don't look at oil as a whole market. We have separate sort of deep dives into aviation, a different deep dive into cars, into ships, into plastics

and petrochemicals and power markets. And at the end we all came together in our team and put them into one piece. And it was sort of exciting for us to see when all these numbers are added together, what year did we called peak one? Because it's the number everybody's going to talk about and we compare ourselves to others. So whether it came to counting cars on the road, what powered those cars, counting airplanes and the sky ships

on the sea, um demand for plastics and packaging. We went from the ground up for all of these pieces, piece them altogether and got to this overall peak oil demand story by five. And it is interesting to see when you look at those individually, you don't think at all about what this means for peak oil de man as a whole. You're really looking at the sector as a base. So you know, some do peak, some don't.

We think aviation, unless there's going to be something rapid or a big technology change, probably won't peak in the next thirty years or so, whereas where there are some other sectors that have a solution already in place, maybe not at scale just yet, Um, there's hope for peak there. So when we look at them individually, we weren't really thinking about a peak oil story when we roll them all, look, but we've got that kind of exciting one veil of

that was it. So it's massively at bottom up exercise with lots of nice inputs and data points that got to this sort of over arch of peak oil demand story. To your point about COVID, there are certain industries though that maybe take quite some time to come back. So you mentioned aviation just now, and I'm thinking about all of the British Airways planes that have been retired and the fact that they recently started selling off the I guess the business class and the first class cutlery and

plates and bowls and things. But I mean, in all seriousness, that's an entire fleet of planes that have been retired because they're not in use at the moment. It's going to take some time for that to come back. And do you think that that gap, I mean, I know we're here to talk about peak oil, but in not aviation specifically, But do you think that that gap could provide potentially a space for some of these industries that

are hard hit by COVID to actually re emerge differently? Yeah, come back, greener, I guess is that kind of fingured it into its a in stressed area for lots of different sectors and lots of different bodies who regulate or orchestrate what happens in these sectors. If we look at the aviation sector as an example, you're seeing less and less of us flying this year, about fifty less people are flying versus last year, right, or less passengers, I

should say, So you don't need as many airplanes. The older airplanes, like you said, are getting parked or taken apart for pieces and what's left is basically the more efficient ones. Right. An airline doesn't want to spend its money on jet fuel, right, It wants to have a really efficient airplane and get tickets in and fly people. You can take the same logic and look at different sectors the same way. Some it's beneficial for well this it's not so. If you look at plastics, for example,

there's more demand this year for plastics. You're seeing a lot of things. If we get a meal, now you don't just get a knife and fork that's plastic, get a plastic knife and fork that's wrapped in plastic. More plastics and masks for example. And then you have cars we saw this year, for example, passenger car sales pretty much around the world have fallen and in some cases collapse in sales. That means that the turnover of the fleet, of the internal combustion engine fleet at least is slower.

So you've got more inefficient cars left on the road. You could argue the driving more or less. And in some cases you've seen the sales that are recovering a lot more of them being electric cars. So Europe is a good example where they're incentivizing to get any car sales going electric cars, and we're seeing big proportions of

all the new cars sold in Europe being electric. So yeah, it's it's not as easy as story is saying, oh, it's coming back greener, because every sector is very different, but you are having pushes, particularly from some policymakers to

go towards that way. Last year, we had you on the show talking about road fuels and the outlook for those, and the conclusion was that they were going to keep going up, right, because I think it was increased deliveries and I think increased drivers or because number of drivers in currently developing markets. Did your outlook change for road fuels as a part of this neo exercise? And how does that fit in with peak oil? It feels the

most important part of the oil consumption. Pie. It's about it something like forty seven percent of all of the oil consumed in the world. So when we spoke about this last year, we saw the passenger consumption, so passenger cars that me and you would drive, for example, demand is likely to decline. We're seeing lots of electric vehicles, lots of regulations about fuel economy, so that that goes down.

What we saw driving growth was truck's, commercial vehicles, things like Amazon deliveries, and again COVID has impacted each of

these segments very differently. So in Europe we're working from home, for example, the vast majority of commuters in Europe go to work on things like the tube here in London or the metro in Paris for example, So that doesn't directly impact well, it does directly if you get a bus, but it doesn't as have as big an impact on road field consumption as if you were to take the same example in the United States, where a lot of

people drive to and from work right over nine. So the private or the passenger segment, I mean you're driving, took a big hit this year in in the world pretty much in terms of oil consumption. On the other side, though, we've all been shopping online Ali Baba Amazon. My mom now does her shopping and gets her stuff delivered to her instead of her driving to the store to get it.

And now she's quite comfortable and that drives a lot more than shoes to That means that there needs to be a delivery driver to send that to her house. So what we've seen is we've actually got support for things like delivery vans that normally run off of diesel driving to the house of somebody and delivering something, as opposed to say the gasoline that was consumed in the

passenger car going to a store to get something. So underlying all of this destruction, you're seeing a change in dynamics. And this is really important if you're a refiner or a fuels producer, right, you want to know what's doing well, what's not doing so well. Jet fueled man is quite obvious to go down. Gasoline is taking a hip. Diesel is doing not so great, but much better than gasoline. Right. This all impacts that these guys are going to run

their companies. So every sector COVID hit in a different way. Passenger and road transport in general not left alone, but under that sort of there's different dynamics of things that have done really well out of it. So more deliveries for sure, Mrs Doherty, if you're listening, you're not alone. I haven't been to a grocery store in over six months. I don't remember the last time I've been in the store.

I think, I think I feel sorry for the delivery drivers who have to have a chat once they deliver I was gonna say, my street is nothing but delivery vans all day long. Yeah, I think we've all thought it's a good idea and it is actually incredibly helpful. But yeah, that impacts how we drive our own personal cars. Right, So different dynamics and the oil, the oil pie underlying all that. Now for a very short break, stay with us, So, David, surely this is something that the oil and gas industry

is watching extremely closely themselves. So what is the reaction from that side and what did their forecasts say? Do they differ? Yeah, there's a huge variety of forecasts out there in terms of oil consumption, different scenarios around it. What are the drivers? What does it mean for our business model? Are we going to completely change our business model?

And it really really varies, honestly. You've got some people like BP and Hotel who are looking at declining oil demand from about twenty thirty onwards, and then you've got others like OPEC, for example, who see it getting slower in terms of growth but still growing out for example, So two different stories. If you were to look at those forecasts, what does it mean for an oil and gas company? I mean in theory. This is their bread

and butter. We're seeing different approaches. Some are turning into energy molecule sellers, if that makes sense, as opposed to oil and gas producers. So I want to sell you a jewel of energy that could be electric for your car, that could be you know, anything for your home, gas, you name a biofuel, their few we got you, and you've others here sticking to oil and gas. So massive different forecasts out there and big variations in terms of

approach and how they'll respond to this. Either way, there will be a requirement for oil we think in the next thirty or forty years, and and how that comes out of the ground and who produces it, you know, it remains to be seen. But we have seen this year and it's interesting that has been the year for it. Given the massive disruption to demand and the hit for the oil sector, we've seen a lot of strategies changing.

You know, the European oil majors, for example, have really shifted towards this big energy business model where we'll send we'll sell you anything from hydrogen to bios us to you know, electricity and more renewable focused energy supply. And we've seen others like national oil companies who don't normally outline strategies stick towards the oil and gas side of things, and even some of the US oil majors sticking towards it.

But without question, this disruption to the man and this peak story, it hits the bottom line for an oil and gas company. I mean, we've seen in over seventy billion dollars of right downs at the five big oil majors already. That compares to like thirty billion dollars in fourteen during the previous oil price crash, so really really large numbers here. It is a bit of a reality

check for their business model. They know this, and it's it's not news to an oil and gas company who are looking at this, But we have seen that this big demand shifts in mentality or maybe acceptance might be

a better way to phrase it. You know, ultimately is going to impact the oil price long term, and that changes what oil barrel you're going to go for in the future, and what when you're going to try to get out of the ground, and how can I make an oil barrel more appealing in the future while keeping it cheap and keeping its emissions as low as possible. It just maybe kind of wonder I guess which companies are going for the power model, but also which ones

are going all in on oil. Like we talked a couple of weeks ago on the pod about I think it's occidental who's going in all in on oil, but they're also banking on ccs, you know, at least in name I don't know, or c c US whatever you wanna call it. Do you see that as common or or other companies taking this on all? Are they kind of alone in this? No, it's not, it's not uncommon at all. You're seeing a real split at least in the integrated oil companies or the listed Western oil companies

I suppose. And again, if you look at in Europe, you're seeing the likes of BP, Shell and Hotel setting quite aggressive missions reduction targets, normally by far away and a lot of it's sort of phrased in a way that will actually allow them produced to produce more oil and gas if they wanted to throw me like energy intensity based. But you are seeing others who are really focusing on the oil and gas story. It's not necessarily a bad approach because the way the oil comes out

of the ground. It doesn't just keep flowing forever. You know, you've got oil wells and current fields that deplete over time. So if you were to look at all of the oil that's being extracted today and then look at the same supply in twenty you're going to have less than a third of that still coming out of the ground, right, so you need to replace it. And you're seeing places are companies like Conico and Occidental still focusing on extracting oil.

How they do it, you know, it varies. It could be a shale play, it could be offshore place, but in general they're shifting towards getting at least the carbon profile of their barrel lower, so that every barrel that they extract has a better carbon emissions profile than the one that they had extracted. You know, in the previous year. Some of them have set targets, some of them are

relying on new technologies. Actually they're all relying on new technologies that haven't really been tested or put into scale just yet. But at least they're shifting towards that that model of things, And you're even seeing it with some of the oil majors who want to become a big energy supplier and shift away from oil and gas hotel for example. They'll still continue to take oil and gas out of the ground, but they're focusing on the cleaner

barrel or the higher return cleaner barrel in future. So they're not saying no to oil and gas. They're saying, we're gonna go for the less carbon intensive and the less risky. Big projects like Arctic drilling and things like that have kind of fallen by the waistside now because oil prices are just much lower they can't justify that

big project. But some more simplified like North African extraction projects for example, are still getting attention from these oil and gas companies, even the ones that want to shift towards a utility or renewables power supplier kind of company. So yeah, there's totally different approaches, and some are better than others at least in indicating how they're going to go and extracted in at least a sustainable way. But ultimately,

you're going to need new supply of oil. Even if demand really comes off a cliff and falls to something like million pars per day, you're still going to need new supply to come and meet that. So there's still a business there, and we're gonna see oil being a handling used for quite a while. Right. It's still the entry level jewel to get people out of poverty and supply them most things like wheels that they can drive, right and cooking a while, et cetera. So, yeah, there's

a lot of good in oil. I guess you've just got to think about how it can be extracted in a sustainable way and where there is an alternative. I think that's where we're seeing investment and interest being put into. So that brings us really well to the regional dynamics. And so for these peaks happening at different points in different places, and what are the regional dynamics around peak

oil demand. It's a really interesting story even in how oil and gas companies approach their targets and where they want to sell into. You're seeing different strategies been put in place Southeast Asia and a Arica or for example, growth stories where there's new population coming into wealth, or where people for example, don't own a car, get access to a car, and when it drives that car, they don't care if the car is gasoline, diesel, or electric. They need a set of wheels and they want to

get around, right, it's mobility for them. First step is getting moving. And then you've got other regions like Europe for example, that have quite specifically said we want to be net zero by X year. China came out a few weeks ago said the same. For you are seeing shifts towards this amongst policy makers. That obviously has an impact on where oil consumption happens and how it develops

in future. And I think you'll probably see a clearer path or a direction coming from the US now that there will be a new president in place come So yeah, it's a different story in all different regions of the world, and that really has impacted how the oil companies based on those regions have reacted so total. For example, they have a net zero to target for European oil sales on the product, which they don't have for other parts of the world. That's kind of a talent sign to me.

We've already got places that road fuel consumption has peaked and is in decline in Europe for example. So yeah, the story is completely different and moving at different paces. Some are going to see different parts grow, some are going to see parts slow, even in places like Europe, where it's probably going to be the first place to peek and decline, you're going to see things like aviation

fuel continue to grow. So the story is different by sector, by reagion, by fuel type, but it's fast moving and it changes, you know, as soon as the regulation comes into play or policy. We're seeing these things tipped quite quickly.

So while we wouldn't have had this chat a year ago or two years ago and said these same things, you know, a year makes a massive difference when we're seeing these big pushes and long term comeback greener, I guess after this COVID, So the takeaway to me seems to be okay, come back greener for one, but also that necess are they looking at the peak but everything

besides the peak? You know, the things that contribute to reduction in oil demand are the things that you actually need to be we've you know, humans actually need to be looking at to understand peak. Is that fair? Yeah? I think that's fair. Substitution is a big part of what drive system when that number we think happens comes or if it doesn't come, I mean, whether we drive

use plastics, reduce the plastics. Yeah, Okay, and so that kind of leads me to, are there any sectors or questions in your analysis either this year in NEO that we're kind of gaps or that you hope to fill next year? Is to get more detail on I mean, every year we try to build down new technologies and see what might change or fundamentally destruct the oil market. A good example, I guess this year is the aviation sector.

We saw earlier in this year, for example, air Boss saying that they're going to introduce a hydrogen powered aircraft for commercial use in the second half of the twenty thirties. We don't understand enough about that just yet to see what disruption that could cause. But as new technologies come into the mix and start to be you know, taken more seriously, we have to think about how that is going to impact the oil market. And those things can you know, they come at a tipping point and then

go quite quickly. If you look five or six years ago at a forecast for the road field sector, there will not be that many electric vehicles baked into that forecast, and that's changed significantly regardless of who forecasts. So things like this happened quite quickly. Might be if we see that actually electric vehicles or hydrogen trucks become cheaper, quicker, faster,

and get rolled out quicker. Likewise, that peak and beyond where we see a decline, it might be a much faster decline if the you know, the aircraft fleet is ran on hydrogen, or if all the plastic is recycled and the circular economy policies take a grip and change that sector completely. So yeah, there's a bunch of things that can be done that it will completely change this outlook. Each year. We're going to add into it, of course, and I do things better and more granularity to get

a better understanding of them. But it just takes one or two technology changes to really shift how quickly this thing goes from a story into maybe a story. But I think that there's more that can happen to bring it closer to us in time then would likely happen for to move further out of time. So what I mean is more likely that it will happen quicker and peak versus being pushed back and further out into the future. It can happen faster. I guess that's all you're saying.

I think, so, yeah, yeah, I think so you get a policy, push a subsidy something like that, and you never know, Like the trucking fleet in Europe could switch away from diesel quite quickly if it was pushed to do so. That's big, that's a big amount of barrels. So yeah, it can happen pretty quickly. I still always think about how quickly mobile phones have changed the way that we all live. I think someone said that, like technology feels like it's happening really slowly, but actually it

happens extraordinarily fast. I mean, the key thing for anything is that the substitute needs to do the exact same thing as the thing that it's replacing. We've seen already with electric vehicles that people talking about, you know, range anxiety for example, has gone away really quickly. So if you could get truck drivers on board and say, do you know, actually this hydrogen powers my truck and I can drive it the same way as I used to

drive my diesel, whether their shipped towards it. When the cost makes sense, if I'm flying somewhere on vacation and it's an electric or a hydrogen aircraft, and I don't have to pay four times the ticket price and it's pretty much the same. You know, I'm gonna fly on that airplane, but it has to be a perfect replacement. I guess you know everybody has had that Soviet paper or cardboard straw with their drink, and nobody loves that. That's not a direct replacement for a plastic straw, right,

It ruins your drink. So it's all about what the replacement can do to mimic and directly replace the thing that is getting rid of O shifting. So between now and hopefully you will still be doing this podcast at that point, let's make sure that we don't miss the peak if it hasn't already happened. If we find that that day has come, we'll have you back on the show and we'll talk about it then. Thanks, Dana, I take that as an open in fine. Thanks, guys enjoyed.

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