Study Finds that Peak Oil Demand is Decades Away, but Minimizes Effects of Rising Consumer Product Prices

Posted by Josh Garrett on March 15, 2010 at 2:51 pm

According the recent report “World oil demand’s shift toward faster growing and less price-responsive products and regions,” current demand trends will continue into 2030 and grow global demand by some 40 million barrels per day. (image: econ.nyu.edu)

The Financial Times reported on Monday that a new study by British and American economists finds that global oil demand predictions by the US Department of Energy, the International Energy Agency, and OPEC fall well short of the mark. The study, written by Joyce M. Dargay of England’s Leeds University and Dermot Gately of New York University (available for download in its complete form at the NYU Department of Economics’ website) predicted that global crude oil demand would reach 138 million barrels per day (bpd) in 2030, about 30 million higher than the estimates of the aforementioned organizations.

The key element in the study’s picture of oil demand is its presumption that world per capita oil demand will continue to grow at a steady rate, while estimates from the IEA and others rely on an overall slowing in the growth of per capita demand. The study’s authors argue that previous declines in per capita oil demand that occurred in 1973-1984 and 1998-2008 were precipitated by declines in consumption that cannot and will not be replicated in the next three decades. The study attributes both decline periods primarily to developed nations’ (the Western nations of the OECD and former Soviet countries) switching away from oil as a fuel for electrical plants and residential heating fuel.

Demand for heating oil and residual fuel oil (a dirtier oil used mainly for industrial applications) has declined by 30 percent since 1971, the study reports. In the absence of major demand destruction during the next 30 years, the study concludes, oil demand in the OECD will not continue on its recent path of decline, but stay flat. At the same time demand for oil in developing nations led by China and India will increase markedly, bringing about a steady climb in average per capita demand around the globe. The study’s introduction lays out its conclusions this way:

If annual per-capita oil demand growth rates to 2030 were assumed to be held zero in the OECD, 1% in the [Former Soviet Union], and at its 1971-2008 historical rate (2.54% annually) in the rest of the world, total oil demand will be 138 mbd in 2030.

Nearly all economists and oil market observers agree that rapid economic growth in developing nations will provide the biggest boost to future global oil demand. The question is whether or not declining oil demand in the industrialized world will be big enough to offset or at least slow the rate of growth in global oil demand. For the authors of this study, the answer is a clear and simple ‘no way’:

Now that the OECD and [Former Soviet Union] have almost exhausted their easy fuel-switching opportunities, it will be much more difficult to restrain oil demand growth in the future, while the rest of the world’s economies and population continue to grow.

Essentially, the study argues that, despite a lot of talk about reducing fossil fuel usage and driving more fuel-efficient vehicles, the developing world’s efforts to curb its consumption of oil will be futile. Or, to put a finer point on it, the developed world’s piecemeal demand reductions will be dwarfed by demand increases from the developing world as its economies and share of the world population balloon.

The study’s argument is a compelling one, but it all but omits one important factor: the effect of rising prices on consumption habits. The study considers rising prices as a salient factor in possible demand reduction in its conclusion, but at the same time ties it to other factors that the authors claim would have to happen all at once to make a dent in global demand:

Hence this imbalance [between demand growth from developing nations world and flat demand from developed world] would have to be rectified by some combination of higher real oil prices, much more rapid and aggressive penetration of alternative technologies for producing liquids, much tighter oil-saving policies and standards adopted by multiple countries, and slower world economic growth.

Under the study’s own assumption of rapidly growing overall demand, oil prices would likewise climb at an accelerating rate. If price increases were big enough, it would be reasonable to expect dramatic shifts in the culture of consumption throughout the world, as we caught a glimpse of when oil prices skyrocketed to $147 a barrel in 2008. Even in the car-crazy United States, consumption of gasoline dropped off considerably in a relatively short amount of time in direct response to prices that hovered near $4 per gallon. According to the study’s model, drivers around the world will soon see prices at that level and beyond, but will not react strongly enough to change current consumption patters.

While the study does consider consumer prices in a nominal way, it excludes specific data on those prices due to a lack of data:

Oil product prices are only available for a small sub-set of countries. For this reason, crude oil prices are used instead of product prices for most of the analysis and the prices of other energy sources are excluded from the demand model.

In light of this exclusion, it’s worth noting that eventualities like $5 per gallon gasoline in the US that are not a direct result of temporary political or economic events would be unprecedented. In kind, consumers’ reactions to such price spikes would be unprecedented as well, and could include massive cultural shifts that that would seriously and permanently cut into global oil demand.

By minimizing the influence of consumer prices in its scenario, the study misses the opportunity to paint a complete picture of oil demand for the next 30 years, as increased demand will almost certainly bring increased prices for every petroleum product in the world. With consumer reactions to those price increases omitted from the study, it amounts to vigorous intellectual exercise, but falls short of presenting earth-shattering evidence that recent predictions on global oil demand are wildly inaccurate.