Have we reached peak oil?

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Is “peak oil” upon us?

With the onset of the pandemic, the world came to a sudden stop. Factories churning goods, came to a standstill. Cars rolling down the street were forced to hit the brakes. Skies once bogged down by pollution miraculously cleared. A global shutdown has inadvertently reduced greenhouse gas emissions, and policymakers have been forced to confront the glaring issue of climate change, specifically in regards to energy and oil production. Analysts for decades have made claims that oil supply has reached its peak output, only to be disproven through technological advancements that enabled oil companies to extract oil previously inaccessible. This “peak theory” was coined by Marion King Hubbert, who believed that oil production would initially increase, reach its peak and decline. It initially referred to oil’s finite supply, with debates on consumption rates rapidly depleting oil reserves beginning as early as the 1950s. In a recent turn of events, trends now indicate the world may have reached a point of “peak oil demand”.

Data from the International Energy Agency indicates that renewable energy sources account for nearly two thirds of total new power capacity in 2016. Over the next two decades, renewable energy is projected to be the fastest-growing primary energy source globally, and will account for two thirds of global investments.

Oil majors are facing a potential decline in demand for fossil fuels, a trend further accelerated by the COVID-19 pandemic causing a sudden and sharp decline in demand. Transportation accounts for 75% of the world’s crude oil, and with drivers making a switch to battery-powered vehicles instead of the traditional gas guzzling pickup trucks, forecasts for electric vehicles will be a definitive factor in shaping the future demand for oil. Despite most car manufacturers taking a severe hit in 2020 due to the pandemic, electric car sales grew considerably. Tesla for example, broke their sales record for cars sold that year and boasted its longest period of profitable quarters. Along with the cost of building electric vehicles decreasing to similar levels to gas-fueled vehicles, electric vehicles will become cheaper and more accessible to the general public. With the line between liquid fuel and power sources blurring along with the prominence of electric vehicles, renewable energy is now becoming a cheaper form of energy, replacing the need for oil.

Investors are also becoming increasingly socially and environmentally conscious. Research suggests that investors are beginning to pressure companies to disclose consistent, comparable, and reliable environmental data. Activist shareholders in particular are demanding US and European oil companies to reevaluate their climate policies and emissions-reduction plans. For example, Larry Fink, CEO of BlackRock- the world’s largest asset management firm, announced the firm’s commitment to, “place sustainability at the center of its investment approach.”

Rising costs of oil extraction is also incentivizing oil companies to consider more renewable energy resources. Oil and natural gas still account for about 50% of the world’s primary energy demand. It is projected that oil demand will reach its peak within the next two decades, and will gradually lose its market share to cleaner and more environmentally sustainable counterparts. Demand is decreasing at a faster rate than oil supply.

How are companies reacting to these trends?

European oil major, BP, forecasts that oil demand has peaked in 2020, the most aggressive projection made. In all its scenarios, including one in which there is no stringent enforcement of environmental policies, oil demand will begin to fall. BP predicts that demand will fall from a range of five million to forty-five million barrels per day. Their report goes on to say that two thirds of the demand setback is attributed to the pandemic, with travel being curtailed and people working from home. The rest is a result of permanent changes in consumer behaviour.  Considering these trends, BP has shifted its focus to low-carbon power. The oil major aims to achieve “net-zero” carbon emissions by 2050 and plans to reallocate investment away from oil and gas business and into renewable energy projects. BP is transitioning into what they call, “an integrated energy company”. They also plan to increase funding for low-carbon operations by $5 billion into 2030, as well as reduce oil and gas production by at least one million barrels per day from 2019 levels.

BP’s competitor, Shell, follows in their footsteps by announcing its own plans to reduce output by one to two percent a year. They will cut production in traditional fuels like diesel and gasoline by fifty-five percent in the next ten years, and shift to producing more electricity and building new electric-vehicle charging stations. Shell will allocate about twenty-five percent of its annual spending to renewable energy projects. Rivals PLC and Total SE plan to do the same by reducing their reliance on fossil fuels while simultaneously making strides to grow their renewable power base.

US oil companies on the other hand, do not plan to divest in fossil fuels, and claim that the world demand will continue to grow over the coming years. Exxon, an American oil major and regarded as one of the most profitable in the world, was removed from the DOW Jones index in 2020, and sees companies focused on wind and solar energy with market values soaring above its own.

What does a low carbon future look like?

Most oil and gas companies produce scope three emissions (carbon emissions from the production of raw materials). Most shorter term solutions such as reducing older equipment and introducing repair programs, tending to focus on reducing scope one and two emissions. However, the rate of reduction will slow down if companies do not begin investing in new technology. Investing in new technology is paramount to a low-carbon future. This includes focusing on biofuels such as wind and solar power, smart technologies, and other energy-efficient methods for producing green hydrogen. Oil and gas companies can also consider transforming carbon emissions from waste into raw materials or developing carbon capture technologies, both of which can then be commercialized. For example, Canadian company C2CNT, has managed to transform carbon dioxide into highly conductive and stronger than steel.

According to Deloitte’s study, more than fifty percent of oil companies surveyed will begin to invest more in R&D in collaboration with academia, startups, and their suppliers, in order to lower carbon intensity throughout the supply chain. Currently, low-carbon tech investments account for 5% of the capital budget for most oil companies, however, this is expected to increase as demand for oil begins to wane and investors and consumers continue to pressure oil executives.


  1. https://www.wsj.com/articles/shell-hits-its-own-peak-oil-plans-to-reduce-output-11613042962#:~:text=Shell%20said%20Thursday%20its%20oil,55%25%20in%20the%20next%20decade.
  2. https://www.bloomberg.com/graphics/2020-peak-oil-era-is-suddenly-upon-us/
  3. https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2020-full-report.pdf
  4. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-eri-oil-and-gas-decarbonization.pdf
More posts by Maanasa Guda.
Have we reached peak oil?
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