Peak Oil Demand is Coming Soon!
Both demand and supply for coal, oil & gas are about to go into reverse — so why aren’t climate activists cheering loudly?
In the 1980s, I spent weeks at a time covering Opec meetings in fancy hotels in Geneva and Vienna at which ministers — including the then-famed Zaki Yamani of Saudi Arabia and the immediate post-revolutionary Iranians — debated how to share out the burden of cutting production to accommodate falling oil demand. It was hard, and Opec almost disintegrated more than once. But there was one given in the equation that made it all work: Oil use would start growing again at some point. The fall in oil demand that resulted from the huge price hikes of the 1970s would only be temporary.
Now, with the climate crisis, that given is no more. World oil demand doesn’t have much growth left. Another 2%-3% maybe, spread over three to four years. Or maybe less, with “peak demand” arriving as soon as next year.
While that doesn’t mean oil use is about to disappear, it does mean the amount of oil humanity is using will soon start falling rather than rising — permanently. For Opec and for oil companies, that’s a devastating change in the way the world works. But for the climate and for human and other species’ survival, it’s great news. It’s even better because coal and natural gas use are about to go into reverse too, thanks to the rapid spread of renewable energy with battery backup. Together, it means carbon emissions should also start declining this year or next.
So why aren’t climate activists cheering loudly?
Peak oil demand may not be getting much press, but the data-keepers know it’s coming. The world’s foremost energy statistics and forecasting entity, the International Energy Agency (IEA), expects peak demand for all three fossil fuels and for CO2 emissions to arrive before 2030. In its latest review of prospects for the industry, Oil 2024, the IEA sees room for only an incremental 3.2 million barrels per day before demand hits its forever annual average high of just over 100 million b/d.
With the exception of Opec, other energy forecasters mostly agree about peak oil and coal. There’s less consensus on natural gas, but even those who’re bullish on gas predict peak CO2 emissions soon. Some, myself included, see these forecasts as conservative, with peak oil demand in China likely this year or next and the rest of the world close behind. BP, the Western oil company best known for its global energy forecasting, just this week gave 2025 as the likely year for peak oil demand.
In contrast, Opec gamely insists there will be more growth for longer in oil consumption. But its position lost credibility in January, when Saudi Aramco, the state oil company of Opec’s leading member, jettisoned plans to expand its own production capacity. The Saudis have already cut production by roughly 25% as part of Opec’s price-support efforts, and rather than spend a lot of money on still more capacity they won’t use, they want to spend more on diversifying their economy away from oil. It isn’t working very well, but at least they’re trying.
Most of the growth in oil production this decade has been in the US, up by around 6 million b/d to over 13 million b/d. The reason global oil demand is about to fall is, in a word, China. In recent years, China has accounted for as much as half of all global oil demand growth, and that growth is faltering. In fact, in both April and May, it stopped altogether: China used less oil in those months than it did a year earlier. At a time when the West is on an anti-China binge, driven by politicians left, right, and center, perhaps this is why the reactions have been so muted.
Reasons for China’s slowdown aren’t hard to find. Instead of growing its economy at 7% or more per year and making many of the world’s most energy-intensive products and structures, China is struggling with an intractable crisis in a housing sector that once gobbled up fossil fuel-intensive steel and concrete. Its energy-intensive manufacturing sector has stalled amid a trade war with the US and others. And it is registering huge growth in electric vehicle (EV) sales — not just cars, but also vans and large buses and trucks.
Transportation accounts for almost half of oil use in China, as it does worldwide. The electrification of road transport is what will pull oil demand into retreat. Gasoline use has already largely leveled off in Europe and the US, but it isn’t dropping quickly given low adoption of EVs and the shift to ever-larger gasoline vehicles in the US. China is what matters at this stage in the energy transition.
Beijing will also likely lead coal demand into reverse. While China has continued building coal-fired power plants, the lightning pace of its solar construction ensures much of that coal capacity will see little if any use. Yale Environment360 summed the situation up recently: “In 2022, China installed roughly as much solar photovoltaic capacity as the rest of the world combined, then went on in 2023 to double new solar installations, increase new wind capacity by 66%, and almost quadruple additions of energy storage.”
Beijing has nominated electric vehicles (EVs), batteries, and solar generation as its “New Trio” of strategic growth industries. If Washington continues to not only block solar imports to the US itself but also push other countries into doing likewise, China won’t stop developing these strategic industries. It will sell more solar, even cheaper, at home and to countries that remain open to this climate bonanza.
The Effects
The IEA reckons that the most likely result of flattening oil demand in the face of capacity growth will be a collapse in oil prices. The agency now forecasts a “staggering” 8 million b/d overhang of excess oil production capacity by 2030. Opec, with help from Russia and a few others, is already holding nearly 6 million b/d of oil off the market in a so-far impressively successful effort to stabilize oil markets. However, they expect to eventually gradually start using that capacity again as demand grows.
If that doesn’t happen, if oil demand instead levels off or starts to fall within the next year or two, as now seems likely, Saudi Arabia’s and other Opec members’ tolerance for producing less than they’re capable of could run out. It’s happened before. When Opec starts pushing more oil onto the market than buyers want, prices collapse.
What would oil prices in the $30-$40 per barrel range — around half recent levels — mean for the energy sector, new and old? Western oil company share prices would surely sink. These companies have attracted investors by paying super-high dividends. But keeping dividends high amid low prices would require drastic cuts in core operations.
It would be a strategy only for the short-term and might reignite activist-investor pressures of the type Exxon faced from Engine №1 in 2021. It would certainly remind big investors of the chronic weak performance of oil company equity since 2008 and the likelihood that companies such as Exxon and Chevron that have not diversified much beyond oil and gas will end up with enormous “stranded assets” as oil use evaporates — whether slowly or quickly — beyond the peak.
An oil price collapse would also be problematic for Mideast and Russian state oil companies and the governments they bankroll. The state oil companies could offset some of the price-related losses by upping sales volumes. But if the Saudis thought they could make up for a lower price with heftier volume, they would surely not have cut production to begin with.
Ironically, it’s not clear that the solar and EV heroes of the transition would fare all that well under rock-bottom oil prices either. They too exist in a competitive, free-market world, and their comparative economics would suffer. How much the price of gasoline matters when car buyers consider whether to buy an EV is a matter of dispute. But it matters some. If natural gas prices follow those of oil, as they still tend to do, that would reduce the advantage solar and wind currently enjoy over gas-fired power in most places.
In the West, share prices for solar and wind manufacturers, installers, and renewable power generators have long been notoriously volatile. Instability in government support and in trade tariffs and other import constraints hasn’t helped. While Beijing’s support for renewables has been steadier, its solar, battery and EV producers are now struggling with surplus-capacity-driven volatility, as well, and an oil price collapse might further unsettle prospects for those companies.
Energy bills would go down dramatically in low-income oil importing countries of Africa and Asia that are struggling mightily both with interest rates that have been hiked to counter US and other Western consumer inflation, and with the world’s failure to deliver on UN climate-related aid promises. That’s a positive for equity, but bad for the speed of the transition to renewables.
The Lessons
None of that sounds exciting and hopeful for climate activists. This kind of ambiguity may be part of the reason why so many call for governments to order a cut in oil production or even to dismantle the oil industry. But the likelihood that such an edict would ever be issued is negligible, not least because it would send gasoline prices through the roof and penalize everyone who owns oil company shares, including pension and retirement funds. Even visible, deadly heat waves, droughts, storms, and wildfires aren’t making it so.
Nor would price controls easily cure the problem. Most countries rely at least in part on imported oil and have no choice but to pay the international price. If that price isn’t fully passed on to individuals, the government has to swallow the bill. Many developing countries do this now for basic oil products that low-income people must have, like cooking and heating fuel. But raising that bill could throw those already debt-incumbered countries into bankruptcy.
There is no easy solution to the havoc that would result from abruptly turning off the oil tap. It’s actually better if oil and other fossil fuels are phased out by first reducing demand, rather than squeezing supply.
There’s also the reality that peak now may be too little and late. Climate tipping points already risk destabilizing the planet. Still, we take small victories where we find them and hopefully learn lessons that will help us to better cope with climate chaos and the energy transition as they unfold.
So what are the lessons to be learned? Climate defenders would do well to focus first and foremost on promoting policies aimed at reducing demand for energy of all sorts. At a government policy level, this can be everything from tight efficiency standards for lighting and appliances, to tough heating and cooling limits in public buildings, to mandated withdrawal from the market of internal-combustion-engine cars and natural gas heaters and stoves, to travel and trade restrictions. Efficiency doesn’t sound radical, but it can have radical impacts.
At a household level, a demand-side approach aligns with the ethic of simpler lifestyles with more local food, and what I’ve labeled “personally determined contributions” to saving the planet. The argument is often made by climate theorists that small-scale actions are not only useless compared to the enormity of the problem, but are effectively blaming individuals when the villains of the piece are Big Oil and Big Business.
However, climate change can only be held within limits humans can tolerate if humans decide to live differently. That approach may not have the same visceral appeal as imagining how bad oil execs will feel if they’re ordered not to produce oil. But climate justice is better served, and Western oil companies might actually be weakened sooner, if people could be persuaded — quickly — to buy less and less of the gasoline and other products the oil companies sell.
The energy transition is proving complex, and cause-and-effect are hard to see. One thing is clear, though: The climate and endangered humanity would benefit from more honest analysis and less emotive rhetoric from all sides.
