Last week the Wall Street Journal published a story citing the International Energy Association’s (IEA) forecast for global oil demand to reach new highs in 2023. The IEA is not alone. The acceleration this year is mostly caused by the re-opening of the Chinese economy after the zero-COVID-19 policies of 2022 proved to be unsustainable. The likely acceleration in global oil demand, driven by non-OECD* regions, is also a reminder of how premature earlier forecasts of peak oil demand were. The reality is that we are years – if not decades – away from peak demand as emerging markets continue to grow and non-electricity generation uses of traditional hydrocarbon-based energy prove very difficult to replace. In contrast, it is much more likely that the next several years are characterized by stagnant or declining oil supply, causing oil and gas prices to grind higher.
Three Drivers of Peak Oil Supply
Capital Scarcity: Through 2022 there has now been greater than $40 Trillion of institutional capital that has divested and committed to defund fossil fuels. Combined with globally higher interest rates and impatient public investors in Energy sector equities that are asking for dividends and share-repurchases, the available capital to invest in oil and gas exploration and infrastructure is scarce. This era of scarcity is a stark contrast to the “free-money era” that characterized the growth of shale-focused fracking and the resulting surge in oil production, especially in the United States. This era is over.
Peaking Shale Production: There is mounting evidence that we will see peak oil production from North American shale within the next two years1. Specifically, initial production rates for wells completed in 2022 in the most prolific of shale fields, the Permian Basin, declined more than 15% versus 2021. This decline is shocking given the contribution this region makes to overall US oil production. There is a possibility that new technology and more capital can help reverse this trend, but those investments are scarce. Without more investment, shale fields will become casualties of their own making as down-spacing cannibalizes new well ultimate production.
Crowding Out by Renewables: The urgency of global investment in green renewable energy is building. Government policy along with public and private funding for renewables continues to gain momentum, funneling capital away from traditional fossil fuel projects. This shift will likely result in the largest capital spending cycle in history as capital intensity for renewables is estimated to run roughly double that of traditional energy sources2. To create an economically viable backdrop for returns on investment (ROI) in renewables it becomes increasingly necessary for traditional energy prices to stay high to justify this shift in capital allocation.
Conclusion: The combination of capital withdrawal and geologic aging sets the stage for another cycle of Peak Supply fears for global oil. Add the always-volatile and unpredictable nature of energy politics and it seems increasingly likely that energy will be the most important economic bottleneck to understand over the next several years. We have a very long way to go to reach global low-carbon goals and the hoped-for energy independence that comes with domestic renewable resources. In fact, over the last decade the globe has only been able to reduce the share of fossil fuels by 2%. All signs point to an aggressive push to change this pace – and high energy prices seem to be a pre-requisite.
Important Disclosures & Definitions
1 Forbes, Potential of Peak Shale Puts Oil Market on Edge, October 21, 2022.
2 Goldman Sachs, Carbonomics: Security of Supply and the Return of Energy Capex, March 17, 2022.
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