Peak oil is here, writes The Economist.
But not the peak oil you're thinking of, where supplies dwindle and prices march inevitably higher. That's so 2008. This is peak oil demand, and it could hit in the next few years.
We believe that demand, not supply, could decline. In the rich world oil demand has already peaked: it has fallen since 2005. Even allowing for all those new drivers in Beijing and Delhi, two revolutions in technology will dampen the world's thirst for the black stuff.
The first revolution was led by a Texan who has just died (see article). George Mitchell championed "fracking" as a way to release huge supplies of "unconventional" gas from shale beds. ... The other great change is in automotive technology. Rapid advances in engine and vehicle design also threaten oil's dominance. Foremost is the efficiency of the internal-combustion engine itself. Petrol and diesel engines are becoming ever more frugal. The materials used to make cars are getting lighter and stronger. The growing popularity of electric and hybrid cars, as well as vehicles powered by natural gas or hydrogen fuel cells, will also have an effect on demand for oil.
The last time domestic oil production was as high as it was in May (about 7.5 million barrels per day), current college seniors weren't yet alive:
And here's demand, measured by oil supplied to U.S. markets. It's fallen to near levels last seen when Bob Dole was running for president:
Rising production and falling demand is a dynamic few predicted even three years ago. But it's today's reality. And it can stop the end-of-the-world peak oil argument dead in its tracks.
These comments tend to bring up one question and one rebuttal.
The question is, Why hasn't this lowered gas prices?
There are two answers. One is that nationwide gas prices are lower today than they were five years ago, so the impact rising production may have on prices is a matter of perception. Second, and more important, oil trades on a global market, and rising American production has been offset by geopolitical factors like Iranian sanctions.
The common rebuttal to the peak-demand theory is to point to China.
A rising Chinese middle class means tens of millions of more cars on China's roads over the coming decade, which should push oil demand inevitably higher.
But oil demand from growth in Chinese autos is being dampened by the same force affecting America: rising fuel economy.
There were roughly 115 million cars on Chinese roads last year, and that figure should rise to above 200 million by the end of the decade. But the Chinese government recently imposed strict fuel economy standards that should bring average passenger cars' fuel consumption from 8.2 liters per 100 kilometers in 2008 to 5 liters per 100 kilometers by 2020. The country hopes to have 5 million electric vehicles sold by the end of the decade. And forecasts of massive automobile growth assume China's roads and air quality can handle such a surge. Perhaps they can't. Four major Chinese cities already restrict vehicle sales. Eight more are expected to do so, according to the China Association of Automobile Manufacturers. Combine this with slowing population growth in Europe and Japan, and oil's demand story can deflate quickly.
Two hundred years ago, Thomas Malthus predicted that population growth would outstrip food production, leading to inevitable misery and famine. "The power of population is so superior to the power in the earth to produce subsistence for man, that premature death must in some shape or other visit the human race," he wrote.
What he overlooked was humans' ability to adapt through increased agricultural yield. The long-term energy story may be similar. Auto giants from General Motors (NYSE:GM) to Toyota (NYSE:TM) have doubld down on fuel efficiency. New jets from Boeing (NYSE:BA) emphasize fuel efficiency. Buses, trucks, and factories have all become more efficient, and in some cases are switching to new fuels entirely. Energy analyst Daniel Yergin points out that the United States uses less than half as much energy per unit of GDP today as it did in the 1970s.
What looked inevitable a few years ago -- falling production and rising demand -- isn't so clear any more. We are adapting. And like Malthus, predictions of inevitable gloom may end up looking severely overblown.