The notion of "peak oil" has been thoroughly debunked.
Repeated predictions of the world's oil shortage in coming
years simply failed to account for our ability to tap into
deeper, more complex seams of energy, buried under the ocean
floor or the Arctic tundra. It may become more expensive to get
at those new pockets of oil, but it's hard to see how we'll run
out of "black gold."
And frankly, the whole discussion is becoming moot -- because
our global need for oil is about to peak and eventually decline.
As that happens, the economics of the entire energy sector are
set to change radically.
No More Super-Spikes
Just five years ago, the global economy was deeply shaken by a
huge spike in oil prices. China's rising demand led to fears that
oil supplies simply couldn't keep up with an inexorable rise in
To be sure, emerging market economies such as China and India
continue to expand. As a result, their oil consumption is
expected to keep rising. Yet the rate of growth will sharply
slow. For example, China's government policies now aim to boost
demand for more efficient cars, electricity-aided buses, while
tougher building design codes and a raft of other efficiency
gains also blunt the country's energy growth.
Yet in the rest of the world, these dynamics are already
playing out, which explains why oil demand is about to peak. Here
are some quick examples:
- In the Middle East, plans are afoot to switch power plants
from oil to natural gas, leading analysts at Citigroup to
forecast that the region will consumer two million less barrels
of oil per day by the end of the decade.
- Here in the U.S., the fuel mileage of new cars is
increasing by 3% to 4% annually. According to the University of
Michigan, the average new car now gets more than 30 miles per
gallon. That's up from 25.6 miles per gallon in August,
- The global plastics industry is quickly transitioning from
expensive crude oil to cheaper natural gas.
- LED light bulb adoption is set to steadily reduce household
electricity consumption, especially now that
is making a big push.
- Ships, trains and trucks are also starting the slow
conversion away from diesel power and toward liquefied natural
All of this leads Citigroup's analysts to denote a major
market shift. "The structural bull of the previous decade was a
result of surging global oil demand...but the outlook (for
demand) has now reversed." They figure crude oil prices will
settle in near the $80 per barrel mark by decade's end.
It's easy to chalk this up to the natural gas revolution seen
here in the U.S., but energy efficiency should get even more
credit. The U.S., which still accounts for 25% of global GDP, is
a great example. From 1950 to 2000, U.S. per capita income rose
more than 200% while our energy use rose just 50%. Since 2000,
our per capita income has continued to rise, but our energy use
per capita has actually begun falling.
Look for these trends to continue. According to the U.S.
Energy Information Administration. our nation's "energy
intensity" is on the cusp of a steady decline. Key highlights
from this report include:
- Energy used per household is expected to decline about 27%
from 2005 to 2040.
- Commercial energy intensity (defined as energy used per
square foot of commercial floorspace) will decline about 17%
from 2005 to 2040.
- Industrial sector energy intensity will decrease 25% below
its 2005 level in 2040.
- Automotive energy intensity is projected to decline by more
than 47% by 2040 from the 2005 value
When Will Demand Peak?
All of the demand drivers noted above are set to play out over
the next half decade, but global oil demand will keep rising in
the very near-term. The International Energy Agency, for example,
expects the world to consumer 92 million barrels of oil per day
in 2014, which would be 1.1% higher than the 90.9 million barrels
per day this year. Note that the forecast comes in tandem with
expected global GDP growth of 3.8%.
Though global GDP will presumably expand 3% to 4% in 2015,
those gains noted above will likely push the growth of oil demand
to less than 1%. By 2016, we may be looking at the peak, as
energy efficiency steps and the rising consumption of natural gas
start to have a deeper effect on crude oil demand.
Citigroup analysts have assessed the impact of energy
efficiency and the substitution effect from natural gas, and see
the oil demand peak coming in 2016.
Winners And Losers
The notion of a demand peak is already having an effect on the
oil industry. Major oil producers are already starting to walk
away from any new projects that entail high production costs or
elevated political risk.
is a prime example. The company's revenues are expected to fall
$7.5 billion this year (to $54.5 billion), in part due to
declining production at existing energy fields. Of equal concern
is the how the company would fare if oil prices settled into the
$80 to $90 per barrel range, as Citigroup anticipates.
In the second quarter, ConocoPhillips earned roughly $13.80
per barrel of oil produced, with an average selling price of
$100.14 per barrel, according to Merrill Lynch. That profit
margin would be virtually wiped out if oil prices drop 15%.
One of ConocoPhillips' biggest problems: an inability to find
low-cost sources of oil. Merrill Lynch, which rates shares as
"underperform," notes that the company is "substantially more
capital intensive versus peers," meaning it needs to spend more
money to get at every barrel of oil it controls.
You could cite similar concerns for any of the oil-focused
global energy firms such as
. They are so large that they must scramble to simply to maintain
output as existing oil fields deplete. And they are likely to be
poor profit generators if oil demand peaks and oil prices settle
in below $90.
That sets the stage for Big Oil to be viewed in the same light
as Big Tobacco, as the operations are run to optimize cash flow
in the face of material revenue headwinds.
Of course, many smaller oil producers will still prosper in
the years ahead -- if they have managed to secure low-cost
sources of oil and gas. The costs to produce oil vary by region.
According to research firm IHS:
- Canadian oil sands require a price of $81 per barrel.
- For an onshore U.S. field, it's $70 per barrel, (though the
range is between $45 and $95 per barrel, depending on the rate
of oil flow).
- In the Gulf of Mexico, it's $63 per barrel.
- In the Middle East, just $23 per barrel.
That's why it's crucial to analyze the production base for any
oil drilling firm you seek to invest in. Many firms that had been
focused on shale gas have inadvertently prospered, as those gas
wells also contain a prodigious amount of oil and gas liquids.
EOG Reources (
Continental Resources (CLR)
are two clear examples.
Of course, the changing global energy picture is producing clear
winners as well. On the energy efficiency front, I profiled the
macro backdrop in this article and focused on companies that
stand to benefit in this article.
Yet we've also extensively covered the opportunities emerging
in natural gas. Roughly a year ago, my colleague Joseph Hogue
took a broad look at the global natural gas picture.
For a deeper look at the ways to profit from the global shift
toward natural gas and away from crude oil, you can check out my
comprehensive special report from earlier this year.
The Consumer Angle
Of course, the other clear beneficiary of a peak in oil demand,
and subsequent pullback in oil prices, would be the U.S.
consumer. According to Deutsche Bank, every 1-cent drop in
gasoline prices puts $1 billion more in consumers' pockets.
And a 1-cent move in jet fuel prices affects that industry's
profits by $175 million, according to Airlines.org.
Indeed, many industries are ramping up U.S. production as our
energy prices (thanks in part of our natural gas boom) are lower
than prices found in Europe and Asia. With oil prices poised to
settle into the $80 to $90 range, and our ability to pump
out higher amounts of gas and oil from the shale plays, the
U.S. economy has much more to gain than the top-heavy oil
producers have to lose.
Risks to Consider:
As an upside risk to the peak oil theory, accelerating global
GDP growth in the middle of this decade would likely lead to the
peak in demand being pushed back until 2017 or 2018.
Action to Take -->
The supply and demand factors affecting oil and gas prices are
truly monumental. This is a sector in deep flux, in you need to
drop all of your long-held assumptions and brush up on the myriad
changes set to take place over the next half decade.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.