Peak Oil not before Peak Demand?

Peak Oil not before Peak Demand?

A very interesting article in the Washington Post brings up a point that I have always been thinking about – Peak Oil Demand.  The premise is, at some point we may reach a point where demand peaks before supply; because of new alternatives and driving behaviors which largely are a result of price induction.  It is true if we look at the modes of transportation and energy use, going back to using horse and wood that transformations occur. They do not occur because we physically ran out of them;we still have horses and plenty of wood.   Typically it is because better alternatives became viable.   And perhaps these better alternatives did not show up until the prices got high enough to incentivise certain individuals to think outside the box.

The question as we look out into the future; have we started to reach that point in oil?   Currently I would say besides price induction we have policy induction.   In the US, we have large renewable requirements in the gasoline space.  Much has been talked about electricity renewable requirements, but there is a transportation fuels renewable requirement.  If you go to your gasoline station you will see stickers noting up to 10% ethanol.   This is a result of this policy.   Ethanol is not necessarily cheaper, but it is a push by policy makers to promote a renewable and domestic option since most of the ethanol will come from the corn industry.  

As I noted before in an IDEAL world, I would not support such a program, but we do not live in an ideal world.   You have multiple countries who subsidize their citizens for gasoline and diesel; leaving the US and Europe to be the marginal demand countries to stabilize demand with significant price action.  If these countries did not do this, then we should not be promoting something more costly and benefiting such few.   However the world is what it is.

The current policy actually grows the mandate over the 10% level.  This is problematic in that cars are not designed to handle that amount of ethanol.   Ethanol burns a lot hotter, requiring better materials and design in cars.   There are too many cars out in the market to just allow the rise in ethanol percentage in the gasoline pool.   If they did, many cars will likely have mechanical issues.   So far policy makers have not done a good job in resolving this issue.

I don’t believe we will reach peak oil demand as quickly as talked about in the article.   Demand and price are very well linked.  It is possible to hit a peak but given petroleum’s portability and energy density and also the lack of energy use in many parts of the world, demand will continue to rise albeit at a much slower level than in the past, as prices will likely settle.   Demand and price is finicky.   In the US, as it pertains to gasoline,  people are more concern on the rate than the absolute, given the room to adapt as disposable incomes have risen.  Many people now consider sub $3.50/gallon gasoline price as cheap, but looking back only a few years ago that would be quite expensive.

Your Energy Consultant,

David K. Bellman


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