Oil demand in developed countries - which currently accounts for 54 per cent of all oil demand - likely reached its all-time peak in 2005, according to new research by IHS Cambridge Energy Research Associaties (CERA). That demand, which was lost in 30 developed countries that comprise the Organization for Economic Cooperation and Development (OECD) is unlikely to ever be regained.

That is because the drop in demand is not solely because of the economic downturn. Here is how Daniel Yergin, IHS CERA chairman, explains it:

The economic downturn has been masking a larger trend in the oil demand of developed countries. The fact is that OECD oil demand has been falling since late 2005, well before the Great Recession began.

CERA explains that oil demand outside the transportation sector has been relatively flat since 1980. And demand in the transportation sector, which acccounts for 60 per cent of OECD petroleum demand - should now flatten, as well. because of a number of factors. These include the fact that vehicle ownership rates in developed countries have reached saturation level and they have aging populations with low to negative population growth.

On top of that, the whole push to reduce carbon emissions is leading to a stronger governmental and consumer push for passenger vehicle fuel economy just as alternative fuels and new technologies, such as plug-in hybrid electric vehicles, enter the market. Aaron Brady, IHS CERA director of Global OIl, had this to say:

Petroleum for transportation has been the single driving force behind OECD oil demand for the past two decades. After the oil crisis of the early 1980s, the nontransportation sector turned to readily available substitutes like coal, gas or nuclear power. Now we are seeing the tempering of the last significant driver of oil demand in developed countries - petroleum for transportation.

Which is not to say that that the end of the oil age in these developed economies is imminent, the report says, noting that the size of the decline in oil demand from the peak year of 2005 to 2030 is expected to be fairly modest, assuming that some demand, lost in the downturn, rebounds over the next few years. Mr Brady explains:

The reason for a modest decline is that, although the potential for demand growth has diminished, so has the potential, at least in the short to medium term, for large-scale substitution away from petroleum. Today’s alternative fuels and technologies can only gain market share slowly owing to the slow turnover of the cars, trucks and airplanes that use petroleum. Petroleum will still be the dominant fuel for transportation 25 years from now, although other sources of energy will likely have captured a growing foothold in transportation.

One of these sources is widely expected to be natural gas. Which is why energy companies continue to buy acreage despite the drop in prices from last year. New technology and expertise has increased estimates of supplies in the US from 30 years worth to 100 years worth, and led producers to band together and lobby Congress for natural gas to have a role in any energy bill that becomes law. They note that not only is it plentiful, but the least carbon intensive of the fossil fuels, and could be used as a transportation fuel.

Indeed, there is so much optimism in the sector that drilling has been climbing steadily in recent weeks. But the short term outlook for natural gas is really unclear. Credit Suisse Equity Research notes in a new report it could go either way, outlining 10 bull and 10 bear arguments for 2010 natural gas.

On the bear side, it notes things like the rig count is already on the rise, there is a backlog of drilling wells awaiting completion, and storage is nearly full. On the bull side, it notes things like an economic recovery could stimulate industrial consumption, any advancement in a US carbon emissions policy could support prices for clean burning natural gas, and the majors are de-emphasizing gas rilling in favor of deepwater oil and LNG opportunities.

While both sides offer reasonable arguments, Credit Suisse says it believes the bear points outweigh the bullish ones. That may be true. And other analysts have reached similiar conclusions. But, as the CERA report points out, oil demand has peaked. The coming years could be natural gas’ time to shine.

October 15, 2009 1:10pm in Gas | Comment