oil demand

Simon Henry, Royal Dutch Shell CFO

Simon Henry, Royal Dutch Shell CFO  © Getty Images

On November 2 Simon Henry, the chief financial officer of Royal Dutch Shell and one of the most respected figures in the industry, told analysts on a conference call for the Shell results presentation that he believed “oil demand will peak before supply and that peak may be between five and 15 years hence”. I think he is right, and that the peak of demand will come within five years and possibly by 2020. The reasons for what sounds like a very radical challenge to the conventional wisdom are clear and the advance warning signs are already evident in the data.

Oil demand in the developed OECD world has already peaked and is 9 per cent below the level reached in 2005. In Europe, oil demand is down 17 per cent over the same period. Read more

There are two divergent views of what is happening to the oil price within the industry and among serious investors. 2016 may help us to see which is correct.

The first view is that the price is inherently cyclical. What has come down must go back up again and the deeper the trough the higher the next mountain.

The alternative analysis is that the shift we have seen over the past three years is the beginning of a long-term structural shift which will see energy prices materially lower in real terms in the next half century than in the last. Those who take this view believe, to put it very simply, that the likely growth in supply is stronger than the growth in demand.

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US oil rig. Getty Images

I have always been sceptical of the extensive theories of peak oil built around the study first published in 1956 by M King Hubbert. Those studies have always seemed to ignore the reality of technical progress that opens new frontiers and reduces costs. They have been much used to support the idea that oil prices should be ever increasing, on the basis that scarcity should be reflected in high prices.

The reality is that oil provinces (think of the North Sea) keep going well beyond their original schedule, and recovery rates from established fields keep rising. On average, even after some advances in reservoir management technology, only some 50 per cent of the oil in place is recovered from most fields, so there is a long way still to go. On top of that, we now have tight oil (the oil equivalent of shale gas), which BP in its latest Long Term Outlook now expects to provide some 9 per cent of global production in 2030. Read more