Is the next ‘peak oil’ going to be its final one too?

This article appeared originally in Gulf News: link to original article

What if the next ‘peak oil’ is the last one?

According to analysts, this could happen anytime between now and 2040. The International Monetary Fund (IMF) estimates peak oil to be around 2040 itself. These estimates, nonetheless, were made before the ramifications of the pandemic were fully grasped. That said, peak oil may be sooner than initially anticipated and forecasted.

The disruption caused by COVID-19 to supply chains – and the sudden halt in economic and business activity that came with it – added to the uncertainty surrounding oil markets. The initial drop in prices, and futures contracts linked to them, were indicative of a market that is not just being over-supplied by oil, but one that saw demand waning, if not disappearing, altogether.

That is, the accumulation of supplied oil and the lack of storage capacity resulted in the lowest oil prices seen in decades. Subsequently, the impact extended beyond oil prices to futures too, dropping prices to sub-zero levels in April 2020 for the first time ever.

Already nearing the peak?

Today, we may be on the verge of a potential COVID-19 peak oil as more countries observe normalcy in their economies and demand starts to gradually recover. What may seem as gradual at first could quickly turn into a steep upward curve in oil prices.

How steep that curve is going to be is subject to how fast stored oil will be used up by countries, and how fast supply can be increased to balance demand for oil and stabilise its price.

In a nutshell, peak oil will accompany economic recovery post COVID-19 – but is it going to be the one and only peak oil? There is a short-term trend and a long-term trend here.

Deplete those tanker storages

The short-term trend is one related to COVID-19 and what happens when recovery restarts across the globe. While the aforementioned steepness of the curve would be based on how fast oil stored on tankers and elsewhere is used, its continuity would be decided by what additional supply capacity can be brought online when demand starts growing again.

The longer this takes, the more extended the peak oil period is going to be. Presumably, it would last for a few years, akin to what happened during the 2011-2014 period. The problem with this peak oil is that it is going to cause economic and financial mayhem for countries that rely on others for their energy requirements, which in turn could undermine recovery efforts.

The long-term trend has to do with the broader demand and supply dynamics in global oil markets. Meaning, whether another peak oil would take place is subject to the appetite by suppliers for new investments that would increase their future capacity, regardless of whether supply is coming from conventional oil sources or from other sources.

With regard to demand, it would rely on the overall shift from oil to other sources of energy, renewable and non-renewable, for environmental reasons and to diversify way from over-reliance on oil.

Notably too, such trends would affect and be affected by the shift from selling refined oil to further processing and manufacturing oil into its downstream by-products. The lower the price of oil is, the faster and larger the shift is going to be into downstream production.

Shifting the peak year

On the contrary, peak oil, or oils, may defer such a shift to when prices are low enough, like in past years, to increase profitability from downstream operations. In contrast, a future non-COVID-19 peak oil will only take place if demand far outpaces supply, which could be due to broader demand and supply dynamics or following an economic or financial crisis. Initial predictions for peak oil were set at different years all the way to 2040.

The IMF predicted demand for oil to hit a peak level by 2040 itself, during which demand is expected to significantly outgrow supply. COVID-19 may usher in a much sooner peak oil as economies recover and demand exceeds supply.

A future peak oil, besides the one that would follow post-COVID-19 economic recovery, would be subject to long-term demand and supply trends in oil markets particularly, and in energy markets more broadly. A shift to downstream production would affect – and be affected by -that.

The last thought that I want to leave you with: Is peak oil the best time to diversify a hydrocarbon-based economy away from oil?