Oil Prices: Study Forecasts Global Oil Demand to Peak by 2020

Oil, the lifeblood of the modern/postmodern economy, and a critical factor in U.S. GDP growth, may not be as much of an albatross for the world's largest economy, if a new study has correctly identified a new petroleum trend -- a global oil demand peak by 2020.

Peak oil has been associated with a possible top in global oil supply, but Ricardo Strategic Consulting forecasts that global oil demand increases will gradually taper so that by 2020, possibly sooner, consumption will peak, with demand in 2035 falling below levels registered in 2010.

Efficiency, Bio Fuels to End Oil Use Growth?

The primary factors in the oil demand peak? 1) internal combustion engine efficiency improvements and 2) the impact of biofuels.

Oil traded down $2.06 to $94.69 per barrel on Wednesday at mid-day, pushed lower by concern that the debt-plagued Italy will not be able to service its $2.8 trillion in bonds, which forced the oil lower, and the dollar higher; oil tends to fall when the dollar strengthens, all other factors being equal. Oil is down about 18 percent since hitting a yearly high of about $115 per barrel during the Libyan civil war, but crude is still up about 205 percent since plunging to a 3-year low of $35 during the financial crisis' acute stage in the fall 2008/winter 2009.

First, evolutionary change in the automotive sector will bring about a revolutionary change in fuel demand, Riccardo said in its report. Further, the increased efficiency will more than offset the rise in fuel demand from an expected 80 percent increase in the vehicle fleet from 2010 to 2035. What's more, the reduction in road transportation oil demand is not primarily derived from greater use of electric cars/vehicle, but their use will increase, the report said.

Second, the study concluded that higher biomass selling prices will increase investment in the agriculture sector, producing enough crops for both food and fuel. As a result, the study projects that the production of first generation biofuels may increase by 5-6 times over today's levels, Riccardo said.

Riccardo also sees a continued decoupling of the natural gas and oil markets.

The improving supply outlook for natural gas, with the potential for the surge in shale gas production in North America to be replicated elsewhere over time, and a gradual introduction of a more competitive market pricing dynamic in world gas trade, is likely to drive an increasing disconnect of the gas price from the oil price, encouraging substitution of oil in both stationary and on-road transportation (i.e. natural gas vehicles) sectors, the report said.

Energy/Economic Analysis: The Ricardo study indicates that the recent U.S. trend toward increased car/vehicle efficiency -- and U.S. motorists' preference for higher MPG-vehicles -- will continue. U.S. gasoline consumption peaked several years ago, and if the Ricardo forecast is correct, the trend will be replicated globally, as high oil prices encourage nations to reduce their consumption of oil.

In the U.S.'s case, the refrain has been, Why hasn't the U.S. leveraged its technological advantage sooner -- in engine design, transmission technology, lighter materials etc. -- to increase vehicle efficiency? In other words, the U.S. fleet should have an average fuel economy of 40 MPG by now. That said, if the increases fuel efficiency trend holds and remains secular, it will be a welcomed sight, given the nation's need to both cut its oil use, and eventually transition to other energy sources for transportation. As the adage goes, better late than never.