OPEC forced to face limits to oil demand

Share

Poor OPEC.

The Organization of the Petroleum Exporting Countries is struggling with a lot of short-term worries as it tries to reunite as a cohesive unit and build a floor under crude prices that have been in a slump for more than two years, savaging many of their economies.

The cartel is due to meet at the end of this month to finalize production quotas and, by some accounts, old squabbles among key players are reigniting, raising questions that a deal might be in jeopardy. This has heaped new pressure on oil prices.

Beyond all this, it's also becoming concerned about about the long-term need for all their oil. According to its most recent annual outlook, OPEC is starting to question previous notions about ever-rising demand as renewable-energy sources and electric cars make big strides and the world gets more serious about cutting carbon emissions.

It was only about a decade ago that some of energy's top thinkers were sounding alarms about "peak oil" – production hitting its physical limit. But now, the countries that more than half a century ago formed a united front to wrest control of their reserves from the major oil companies, are being forced to confront the concept of peak demand.

It's been a tough run for the 14-member group. Led by Saudi Arabia, it shifted in 2014 to allocating market share over price, taking aim at the drilling boom in U.S. shale oil and other sources, such as Canada's oil sands. But there's little in the way of gain to show for all the pain.

The collapse in prices has created civil unrest in states dependent on oil revenue, such as Venezuela and Nigeria, which have been among the loudest voices in the group for setting new limits on production. Immediate crises have their leaders much more focused on short-term solutions, none of which will address what might be in store in a little more than a decade.

In its 2016 oil outlook, OPEC says that improvements in fuel efficiency and quicker global adoption of alternative-fuel cars, trucks and buses "have the potential to significantly reduce fuel demand."

The world currently guzzles about 95 million barrels of crude a day and OPEC members supply roughly a third of it.

In one possible scenario, which includes a combination of technological improvements as well as adoption of all carbon-reduction commitments that countries made in the Paris climate accord last year, oil demand would peak at 100.9 million barrels a day in 2029, then decline to 98.3 million by 2040.

OPEC's base case still assumes that demand will keep rising, hitting 109 million barrels a day by 2040. But it's been wrong about the speed of technology development and its impact on global markets before. A quick glance at the U.S. shale oil industry shows how it was blindsided by a rival's massive and relatively inexpensive gains in production and forced the cartel's drastic action on prices. That continues to be a tough lesson.

In the oil world, it's not just OPEC questioning a future of unlimited demand growth. There are others, and they aren't exactly new to the game. Royal Dutch Shell surprised many, including some of its rivals, when it said last week that the world's need for crude could peak in as little as half a decade.

"Oil – we've long been of the opinion that demand will peak before supply and that peak may be somewhere between five and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport," Simon Henry, Shell's chief financial officer, told analysts in a conference call.

That's got more than a few implications for Canada, as the industry weighs the high costs of oil sands development and toughening limits on greenhouse gas emissions. OPEC's report includes a detailed assessment of issues facing the oil sands, concluding that high costs, environmental concerns and opposition to export pipelines represent major obstacles to future production gains.

As it considers the possibility of a shrinking market, one wonders if that is, at least, a bit of wishful thinking on the cartel's part.