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Peak Oil is Dead. Peak Demand is Dead Ahead.

Dec 19, 2016

39

Today's issue is a little different to usual.

That's mostly because of time constraints. I'm preparing my speech for the launch party for The Exponentialist this evening. It promises to be a great event. If you're coming along (it's by invite only I'm afraid) then I'll see you in a few hours.

But there's another reason. It's a unique opportunity for you to see some of our best research without taking out a subscription or reading a sales letter. Let me explain.

Yesterday Eoin Treacy and I published our first ever Frontier Tech Investor forecast issue. It's an extensive and in-depth look at the most important and potentially profitable tech stories of 2017. Things like:

  • Why "peak demand" for oil is coming - and what that means for the markets.
  • How to turn Saudi Arabia's new $100 billion tech venture to your advantage.
  • Mach 2.0: why super-speed travel is nearly upon us.
  • How driverless cars will turn the world on its head.
  • The new energy map of the world.
  • Why solar is approaching the economic tipping point.

I've included one of our forecasts for you below to take a look. It's the tip of the iceberg.

And here's the thing. Usually you'd need to be a full-time subscriber to Frontier Tech Investor to receive this. But I know that some people just don't want to commit to a subscription. I understand that. So I've taken the step to "declassify" this issue and make it available as a one-off. You can download your copy without committing to anything.

That gives you the chance to see our work without feeling like you're obliged to continue receiving it. I think you'll like what you see and will want to take out a full subscription (which is only £29 for a year). But you may not. It's your choice. This offer gives you the freedom to decide.

Just keep in mind that this is an unusual offer. I may not repeat it. And it's only available for a short period of time.

You can take me up on it by clicking here.

Now, let me share one of the key forecasts in the issue. It's all about oil and a major change in the markets new technology is going to bring about...

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------------------------------

Oil demand will peak within five years

"The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil."

So said Sheikh Zaki Yamani, the former Saudi Arabia oil minister, in 2000. It's ironic, then, that the world is running headlong towards that very moment - the end of the Oil Age - and yet traditional oil nations like Saudi Arabia still seem intent on burying their heads in the sand.

Let's back up for a second. Everyone is familiar with the concept of "peak oil".

It's easy to forget that this was once a prevalent and widely held view. The idea that we were using more oil than was sustainable and that one day oil supplies would simply run out seemed logical.

Technology and the power of the free market exposed the flaw in the argument. Fears of dwindling supply helped push the price through the roof. High prices lead to investment in new sources of oil - and non-fossil fuel methods of power generation. Fracking, tight oil and shale gas brought huge new supplies onto the market.

Suddenly the idea that we'll reach peak oil supply seems far-fetched.

In fact, the reverse is true. The single most important idea you need to understand about the energy markets is we're approaching peak demand for oil.

Hitting the tipping point

It's a simple enough idea to understand.

There's a confluence of technological, social and environmental forces merging all at once, all of which will result in lower - potentially radically lower - demand for oil in the next decade.

For instance, in the next couple of years we're going to see a revolution in the car industry, in which car ownership falls off a cliff. I predict this will come about much faster than anyone realises.

That's because of several reasons. But the two to focus on are ride-sharing applications and driverless cars. Every major tech company, and pretty much every major car manufacturer, is working on a driverless car now. There are plenty of estimates that they'll hit the roads in one way or another in 2018. (Perhaps not everywhere, and you may not be able to buy one for personal use, but for taxis and other ride-sharing businesses it looks likely.)

In the end it'll come down to cost. The cost of owning a car in the US averages out at $1 per mile driven. Right now, ride sharing costs between $2 and $3 per mile. So it's still cheaper to own a car.

But the cost per mile for ride sharing is falling all the time. Electrification will reduce it even further. And self-driving cars will result in a collapse in the cost. Once it hits $1 and below, it becomes cheaper to rely on the network rather than own a car.

That won't kill the car industry, as some people will always want to own one. But it'll be mighty disruptive. And it'll lead to "peak car ownership" by 2022, if a recent report by the Rocky Mountain Institute is to be believed.

Electrification and the missing two million barrels

But that's not the only trend that will destroy demand for oil.

You also have to factor in that electric vehicles are now starting to compete with traditional petrol and diesel cars. It's a trend that's developing rapidly right now. And as it accelerates it'll change the dynamics of the oil market.

As a Bloomberg report earlier in the year put it, electric cars make up just 0.1% of the global car market today. That's a number so small as to be dismissed outright.

At least, it looks that way. But all trends start somewhere. And as anyone who understands exponential growth will tell you, the speed with which something like this can go from virtually zero to world changing is remarkably fast.

According to that same Bloomberg piece, electric vehicle sales grew by 60% last year. Extrapolate that growth forward and by 2023 the electric vehicle market will have displaced two million barrels of oil demand a day. That's roughly equivalent to the oil glut that brought prices from $100 to $22. But it'd be permanent. And it'd likely keep growing.

Rising sun, setting sun

That's one key component of demand. The big one of course is industrial power generation.

There's still some way to go here. But we get some sense of how renewables like wind and solar will alter demand for oil and other fossil fuels in places like Germany and Chile.

For instance, Chile has generated so much solar power this year that half the time... it has to give it away for free. Northern Germany has the same problem with wind power, requiring it to route the surplus through Austria and the Czech Republic.

And it is a problem. A new and good problem to have: too much clean energy and nowhere to store it.

Those are just two examples. For more see our feature on "The new energy map of the world" (and for more detail on solar see this month's special feature interview with Tony Seba). But what they show is just how revolutionary renewables will be. They'll bring about a step change in how we generate, store and distribute energy. We expect that to be a big theme in Frontier Tech Investor through 2017.

Peak demand is dead ahead

Surprisingly, some large oil firms already understand this. Last month, Shell chief financial officer Simon Henry said (emphasis added):

  • We've long been of the opinion that demand will peak before supply. And that peak may be somewhere between five and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.

That's an extraordinary admission. But it's probably correct. And if previous disruptions are anything to go on, this one will come quicker than anyone realises. Five years may actually end up being an overestimate.

Not that Opec will see it coming.

Oil is still the world's key fuel source. That makes Opec - and other key oil producing nations who derive wealth and power from oil use - a symbol of the industry as a whole.

It's rich... powerful... important... and perhaps considers itself invincible.

The idea that technology could disrupt its operations doesn't seem to be something it takes seriously, just as it dismissed shale gas and tight oil a decade ago, before it turned the industry on its head. Solar and other renewables aren't on the radar. And neither is the move to electric and driverless cars, which would smash oil demand.

We got a taste of just how Opec sees technology and change to the market last month. Its World Oil Outlook report predicted that oil demand will rise by 16.4 million barrels per day to over 109 million per day by 2040. Opec believes most of that rising demand will benefit... itself.

My prediction is the opposite. I believe oil demand is going to peak within the next five years as electric cars and new energy sources come on stream. And that 2016 forecast from Opec will go down in history as one of those "disruption denial" moments.

Please note: This article was first published in Capital & Conflict on December 7, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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