The Future Of Oil

roche futures

Starkly contrasting views emerged this month about the future of oil. One sees a peak in oil demand as early as 2020. The other sees no peak for at least the next couple of decades.

The early-peak vision comes not from any of the environmental groups advocating soon-as-possible abandonment of fossil energy. It's from the quality-assurance and risk-management firm DNV GL of Oslo.

A flattening market

In its inaugural Energy Transition Outlook, DNV GL projects a flattening of oil supply during 2020-28, followed by a sharp decline. Supply of natural gas peaks in 2035, but gas becomes the biggest single source of energy by 2050, surpassing oil in 2034. Those changes occur as total energy demand flattens in 2030.

The annual International Energy Outlook of the US Energy Information Administration projects a much different scenario. Oil consumption increases through 2040 in EIA's reference-case model projection-and in higher and lower-price cases, as well. Total energy consumption increases. Consumption growth rates for natural gas and renewable fuels exceed that of oil, but gas doesn't overtake oil. Coal use soon flattens and begins a gradual decline about 2025, falling below gas use after 2030. Nuclear energy grows through 2040 at a rate second only to that of renewable energy.

How do two energy outlooks diverge so much? Their assumptions differ profoundly.

DNV GL assumes rapid electrification and major improvements in energy-use efficiency. It assumes that electric vehicles achieve cost-parity with vehicles equipped with internal combustion engines in 2022 and that half of new light vehicles sold globally by 2033 are electric. DNV GL expects a doubling of solar photovoltaic and wind power capacity by 2050 accompanied by cost decreases of 18% for solar PV and 16% for wind. The cost improvement for renewables, DNV GL says, will be "much faster" than that achieved by the oil and gas industry.

What might invalidate assumptions underlying DNV GL's aggressive forecast?

Solar and wind will remain tentative energy sources for as long as they rely on policy-and therefore political-support, high growth rates notwithstanding. They'll make electrification of a commanding share of the energy economy anything but smooth.

A new study by IHS Markit warns of the loss of "cost-effective power-supply diversity," which would make electricity bills high and variable and create "negative macroeconomic impacts that would ripple out through the broader US economy." Government policies threaten to leave some US power systems with minor contributions from coal and nuclear energy and diminished contributions from hydroelectric resources. "They will rely on a tripling of the current 7% reliance on wind, solar, and other intermittent resources, and on natural-gas fired resources to supply the majority of generation," the study says. Comparing two cases analyzed in the study, IHS Markit Chief Power Strategist Lawrence Makovich, the lead author, says, "Increasing exposure to the challenge of managing the misalignment of intermittent generation with consumer demands-plus the price volatility and deliverability constraints of natural gas-reduces the benefits to households and reduces the competitive position of US businesses in the global marketplace."

Those conditions will generate resistance to government policies essential to energy transformation. DNV GL's study includes an important observation: Even with the dramatic changes it projects, greenhouse-gas emission targets of the 2015 Paris agreement won't be met. How long will electricity consumers endure rising costs and deteriorating service in pursuit of unachievable goals?

Conservative assumptions

EIA uses much more-conservative assumptions: continual improvement of known technologies based on current trends, economic views of "leading forecasters," and extrapolation of current policies interpreted to account for stated targets "judged to reflect an actual policy commitment." From conditions more like the status quo than DNV GL's, EIA models a much less-changed energy future.

So what might invalidate assumptions underlying EIA's projection?

The oil and gas industry has much at stake in the answer, a short version of which would be that DNV GL's assumptions survive political opposition and that the firm's expectations come true.