Chronicle of A Peak Foretold

“There had never been a death so foretold”
Gabriel Garcia Marquez, Chronicle of a Death Foretold, 1981

Peak Oil has often been foretold: but now Peak Sales of ICE vehicles, due to the rise of EVs, takes the oil industry’s fate out of its own hands.

What was a supply-driven narrative has become a story of demand.

We noted in a post last week that stories matter when it comes to the discussion of Peak Oil Demand.

It raised a number of comments from readers as to why you can miss such “obvious” trends – and why eg the US coal industry was so recently blindsided by a reverse in coal demand in the US and China.

This is a quick addendum to the earlier post to look at the details of peaks a bit more closely – and especially why a near-term Peak Oil,  though a complex debate, is a growing certainty.

Judgment Under Uncertainty

At the time of a Peak there is an inversion: sales previously growing stronger, suddenly flatten out and then start to decline.

Mathematics is crystal clear about this – it has unambiguous technical terms to define it: the derivative of change moves from positive (growth) to negative (decline).

But human language is more vague and complex.

As renowned psychologists Kahneman and Tversky noted our judgment under uncertainty has us reaching for preferred models or heuristics –shortcuts – to try and make sense of it all.

The chart below, reproduced from the post, is our estimate of how global passenger car gasoline demand (as a prime mover of oil demand) will change over the next few years.

Note – annual sales growth of gasoline (kb/d) – estimates

Even with such a sharp change in trend, the point we made was that, for example, between 2020-2025 two competing theories of future demand would play against each other.

A positive story-line can still follow:

• Sales hit new peak (eg 2022-23)
• Sales flat, but near peak (2023-24)
• Sales decline for second year, but industry expects rally next year (2024-25)

Only at perhaps 2025-26 and onwards would there be an acceptance of a switch in trend, some 3-4 years after actual peak occurred – but even then a new “cycle” might be assumed to re-emerge

In the oil and gas industry, because there have been so many peak and troughs, the growth / decline / growth again narrative tends to be supported by prior data leading to an “availability heuristic” – the probability of an event being driven more by how easily examples spring to mind, rather than objective data.

All of this causes a mathematical “Peak” to be easily missed or dismissed, despite the huge consequences.

It also happens because the oil and gas industry is a supply-driven idea.

Demand Growth Moves to Negative

In the world of oil, demand is assumed to be passive and positive – to “just grow’ in the background, mostly smoothly, with occasional, but short-term reversals.

What really drives the industry is how OPEC and other petro-states act to supply oil.

What the post covered in detail however was that a technology shift in the prime mover of oil demand, the combustion engine, is now causing demand to change course.

EV sales are now growing the same rate – about 1.5 million cars per year – as the growth rate of all vehicles (ICE plus EVs)

This is forcing the growth in sales of traditional oil-consuming cars world-wide to slow almost to zero.

In other words, an almost trivial conclusion follows: annual sales of global combustion engine cars have closed in on their Peak at about 85-90 million cars per year. As the chart below shows, the peak likely occurs next year.

Note – estimates

But cars are not commodities, they are complex manufactured goods.

They are not cartel-controlled, and while subject to demand-supply cycles, they act as most technological devices, strongly impacted by broader technology trends.

Mass-market sales of EVs will push ICE sales into a one-way decline as they displace ICE technology permanently. This overcomes any short-term cycles of demand and supply, and equally forces fuel demand permanently downwards too.

What was perhaps in the past a moral impulse for low emissions, has now become an economic force, propelling the growth of EVs forward in an accelerating manner.

Whilst the exact shape of EV growth is uncertain, its transition to about  2% of global sales this year will mark a major switch in manufacturing, marketing story-lines and consumer behavior.

As a result, the shape of oil demand will from now on be governed more by the long-term rise of EV technology, and less by internal oil industry dynamics or pricing.

Out of its Hands

The oil industry disputes this analysis, and points out that even with a major part of its growth in decline, other parts of the barrel will likely pick up the slack: via trucks, planes and plastics. – see slide 26.

However, the nature of the rise of EVs and Peak ICE undermine this theory, as outlined here by Energy Intelligence.

Car and truck fuel sales make up about 80% of overall oil demand growth – the long quick rise of EVs will stop this historic growth in its tracks.

The same technology that is creating high-density batteries for EVs is already transferable to larger vehicles such as buses and trucks. In mathematical terms the probabilities of passenger-car EV growth and EV growth in larger vehicles are dependent, rather than independent.

Other parts of the barrel are neither large enough nor robust enough in growth to replace the loss in transport fuel demand.

This creates a new demand narrative competing with the dominant supply idea of how the industry works.

For sure, the oil industry has had its Peak foretold often: but from here on its final fate is mostly out of its hands.

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