Stop worrying about ‘peak oil’ production, focus on ‘peak demand’!

August 01 2008 / by Garry Golden / In association with Future
Category: Environment   Year: General   Rating: 6 Hot

By Garry Golden

Most of us have read about peak oil production in which the ability to extract oil reaches a growth plateau and fails to keep pace with accelerating demand. The result could be managing a ‘peak and plateau’ scenario as we gradually shift away from oil, or a ‘peak and collapse’ scenario as the world economy stumbles and cannot adjust to a more rapid decline in production.

But what about the implications of ‘peak oil demand’ from energy consumers? And how might it change the future of the transportation industry?

This notion of ‘peak demand’ is supported by a new report from leading energy-sector forecast firm CERA titled ‘Dawn of a New Age: Global Energy Scenarios for Strategic Decision Making- The Energy Future to 2030’.

CERA suggests that because of high energy costs the US could reach ‘peak gasoline demand’ in the next ten to fifteen years, and possibly plateau as early as 2010. As our vehicles become more efficient and we change behavior, our demand for gasoline will plateau.

CERA’s forecast of ‘peak demand’ is a game changing concept because it shows the transportation industry the ceiling of its growth opportunities in the world’s largest economy. It also forces drastic changes to enable more growth around a new platform as we electrify the world’s transportation sector.

If peak production is our biggest challenge, ‘peak demand’ might be our best incentive for innovation! (Continued)

Why are they forecasting less gasoline ‘demand’?

CERA’s forecast is based on a simple model driven by widely held assumptions about the future. This era of high energy prices (esp. gasoline) is expected to continue for the next two decades- barring major recessions, or market meltdowns that would slow economic growth.

High prices will remain because oil production (not global supplies) will struggle to keep pace with global demand. Advocates to ‘drill more’ ignore realities of the oil industry. It’s too late to ramp up production. Even if we find new giant ‘elephant’ fields of oil (e.g. deep waters of Brazil, Arctic or Gulf), we cannot get the oil out quick enough to meet demand, and the costs of production will remain high as we extract oil from harder to reach places. So high prices are likely here to stay!

Peak Demand and the problems of today

The upside of high prices is sharper pressures on reducing demand. CERA’s report argues that consumers are changing their behavior and placing new pressure on the automobile industry to increase fuel efficiency within their fleets.

Of course this does not mean that we can stop worrying about near term realities of tight global oil markets! Nor does it alleviate short-term pains of high fuel prices, or deny the rapid growth of demand in China and India.

Global oil demand will continue to surge! Our strategy should be to enable systems that help us reach global ‘demand’ plateau sooner than expected.

CERA’s forecast is important as a recognized ceiling on the ‘demand’ curve for the world’s largest economy, and that is an enormous incentive for investments that ‘electrify’ the transportation sector with the hope of eliminating the headaches of oil by 2025.

Two problems with oil – Substitutability & the Combustion Engine

Oil is the perfect fuel because it has high energy density, and compared to coal (which launched the Industrial Age) is a cleaner hydrogen-rich feedstock. It is a wonderful fuel for a world driven by combustion technologies.

But the world is now powered by electrons and electric motors and the transportation sector must also evolve.

Oil is not likely to drive the 21st century, nor (like coal) is it likely to just disappear. Our best strategy might be to eliminate oil’s major limitations for growth inside the automobile industry:

The first problem with oil is ‘substitutability’.

Gasoline is a liquid carrier of energy. We can’t put electricity from solar panels into a gas tank. We can’t put electricity from nuclear plants into a corner gas station pump. Even if we invested trillions of dollars in ‘alternatives’, you cannot put electrons into a gasoline tank (1).

This means gasoline has no real substitute except for bio liquid fuels.

The electricity sector is different.

It offer substitutability as we can get electrons from any input like solar, wind, coal, natural gas or nuclear. Hydrogen, which is another electron carrier, also allows for substitutability.

So what does this mean?

The future of the transportation sector is moving towards electron-based power.

Vehicle designs are moving towards electric motors that can be powered by a combination of batteries, fuel cells and capacitors. There are many debates on the viability and timelines of these systems, but we will save that for another post!

The key concept for the future is ‘substitution’ and diversity of energy sources for transportation! This means that solar, wind and nuclear can all provide energy for the transportation sector. Oil will not be our only choice – as we can use any feedstock.

The important thing to consider is the role of ‘peak demand’ in spurring innovation that allows the transportation sector to move beyond this problem of substitutability. But how will they get there?

Retiring the Combustion Engine

The second problem with oil is that we convert its energy content via combustion inside an antiquated mechanical heat engine tucked under our hood.

We essentially ‘blow up’ oil’s hydrocarbon chains for mechanical power. And nothing could be worse for business profits and the environment given the energy losses and resulting pollution of combustion conversion.

But worse for automakers is the complexities of building combustion engine platform vehicles. It requires too many suppliers, too many laborers and (because of its bulk) limits the design potential for vehicles.

Electric motors (especially wheel based) offer a more scalable and modular platform for automakers. In return consumers get better performing engines and more design friendly options. Electric drive-trains also mean a new industry for US companies to manufacturer high value automotive systems.

Peak Demand is a catalyst of change, not a solution

There is growing industry and political consensus that we are ‘electrifying’ the transportation fleet (this includes hydrogen fuel cells which deliver electricity).

While arguments persist as to related timelines and viability of particular technologies, the direction and course have been established.

‘Peak demand’ shows the auto industry the ceiling of its growth opportunities around oil and combustion engines.

If CERA’s forecast is correct that US gasoline demand could plateau sooner than expected, there could be no greater incentive for the world to enable a shift forward. And it will takes years and decades to unfold.

We cannot slow global demand for oil in the short-term, but by retooling the global automobile industry (beyond combustion engines) emerging markets like China and India could ‘peak in demand’ sooner than expected- and base their own future growth around electrons delivered from batteries and hydrogen fuel cells.

‘Peak demand’ might shine a new light on our best 21st century strategy – retooling the transportation sector. Rather than demonize oil, we might just make it less relevant by attacking the growth limitations of no substitutability.

Even if oil remains a primary input for another 50 or 100 years, we might all agree to accelerate the end of the combustion engine and focus on reaching global ‘peak oil demand’ sooner rather than later.

Image credit: Diaper, Flickr Creative Commons- Thank you!

(Note: 1) You can create liquid fuel equivalents to gasoline if you have hydrogen and carbon resources. Technically you could use electricity (from solar/nuclear) to turn any hydrocarbon feedstock (coal, biomass) into liquids. Process known as Fischer-Tropsch But this is not a realistic alternative on many levels!

You can also use electricity to create hydrogen (via high efficiency electrolysis) to be combusted in a mechanical engine. But this does not eliminate the manufacturing and design limitations of combustion engines.

Comment Thread (4 Responses)

  1. Very insightful as always, gary. You are right, demand is, and has always been, the real problem with oil and I really hope that rising prices continue to spur the electronic revolution and innovation until, as you pointed out, how much oil we have left is of little concern. The place to start is with automobiles.

    Posted by: Mielle Sullivan   July 31, 2008
    Vote for this comment - Recommend

  2. Thanks Mielle! The CERA report did change my views. If we can force early US/global demand and make oil less relevant, the future could be much less tense and cleaner. And I’d be happy if we focused more attention on ending the combustion engine- which seems ripe for disruption! Thanks

    Posted by: Garry Golden   August 01, 2008
    Vote for this comment - Recommend

  3. Great twist to focus on peak demand vs. peak oil and thinking about the many ways to decrease reliance on the antiquated combustion engine.

    Posted by: I Told Ya   August 01, 2008
    Vote for this comment - Recommend

  4. Thanks, I Told Ya. Yes, it frustrates me to talk about ‘oil’ when really the problem is the combustion engine and the lack of substitutability of fuel sources. We can try to have an ‘oil endgame’ or we can just cut out the combustion engine, which I argue is an easier target to take out. One could argue that oil as ‘a perfect fuel’ source is unlikely to disappear, but few can make a strong case for keeping the combustion engine around for much longer. We’ll need to begin that transition soon… and then we can start talking about peak demand knowing that new vehicles sold (say, post 2025) will all be electric-H2 powertrains.

    Posted by: Garry Golden   August 06, 2008
    Vote for this comment - Recommend