What happened to peak oil?

Peak oil demand is a contentious topic. It is crucial for climate change, yet there are possible negative downsides such as volatile oil equity prices and corporate bond defaults.

It is remarkable how quickly and dramatically market narratives can change. Well-established, widely-held beliefs end up being dismissed by the same market participants who had been their biggest advocates.

Peak oil – the view that the world would soon pass the peak in oil production, thereafter entering terminal decline - was one such belief.

Today, it is very difficult to find mainstream market participants who still hold this view. Peak oil is still with us though – only now it is the belief that oil demand is about to peak. While the consequences of peak supply could have been disastrous for economic activity, some aspects of peak demand could be positive as consumers and companies improve efficiency and switch to cleaner energy sources.

A steady increase in oil demand has been very important in supporting strong capital expenditure from oil companies, even during economic downturns. Each year, companies have been confident that demand is going to be a bit higher, and ‘legacy supply (all else equal) is going to be a bit lower. But if oil demand peaks, companies will be less inclined to maintain levels of investment.

Moreover, should excess supply lead to price falls, the oil sector’s equity and bond prices could come under pressure. In 2015 and 2016, falling oil prices led to corporate bond defaults spiking higher and some oil-producing countries slipping into recession.

Focus on transportation

Oil demand is a complex topic, encompassing factors such as economic growth, technology development and government policy. Each could influence whether oil demand is set to peak in the coming years, and we will return to them in future research. However, for the purposes of this analysis we are going to focus on the dominant use of oil today, transportation.

Somewhere between 25% and 30% of all oil demand is attributed to cars and SUVs. Our analysis suggests that at some point in the future we believe it is highly likely that passenger vehicle oil demand is going to peak. That said, we think there are good reasons to suggest this will not happen in the coming five to ten years.