Kate Mackenzie Does peak demand = peak supply?

Last week’s post about Tony Hayward’s comments on ‘peak demand’ attracted some good comments. Here’s our response as a post – since it got rather long:

Firstly, audio of the Hayward interview is now online here. There are some other interesting comments that weren’t picked up in the print reports, including the world’s ability – and particularly China and India’s – to handle high oil prices.

A few commenters raised the contrast or similarity between ‘peak demand’ and ‘peak supply’. Without wanting to stir the pot too much, the demand/supply dichotomy can be seen as just  a matter of semantics – or a matter of disciplines. If you look at the likes of Jeff Rubin, a peak oil economist who writes about the effect that more expensive oil will have on the world, then peak demand is a lot like peak supply, only from the economist’s point of view. (For more on that, see James Hamilton’s great ‘how to talk to an economist about peak oil‘ post.)

Commenter Steven.Kopits said BP should be questioned more closely, because Hayward’s comments suggest he thinks oil prices will fall after 2020, as demand dies down. We’ll ask, but we imagine the argument could go like this: oil will become too expensive for some purposes, economies will find substitutes, and once those substitutes are in place, the price falls again.

Which actually describes how demand has been ‘destroyed’ but has, in many places (such as the US), eventually crept back up again, often leading to a supply squeeze again. Economies take time to respond to oil prices; and oil markets take time to respond to demand changes. There’s a lengthy paper by the Oxford Institute for Energy Studies which we wrote about here that addresses that inherent problem with supply/demand and delays in market signals.

Of course if you prefer the peak oil side of the argument – or indeed peak demand – then that cycle doesn’t have much life left in it.