"Peak Oil Demand" = Peak Oil

If you've never heard of the "Peak Oil Demand" concept, simply stated it's the idea that global demand for oil will peak and decline before supply peaks. CERA and Citigroup began promoting the idea in 2012, but the idea really took off in the media when the Economist produced their article "Yesterday's Fuel " in August.

You can read the BreakingEnergy article on the left for an overview of the "Peak Oil Demand", and then you can read the second article below to understand why "Peak Oil Demand" is nonsense.

I'll have a little more to say about this next week, but the most interesting thing to me is how many VERY ACCOMPLISHED economists have parroted the "Peak Oil Demand" argument. But the argument goes against our basic understanding of economics that we all learned in Econ 101.

In general, the standard "Peak Oil Demand" argument begins by proclaiming that the Peak Oil people were all wrong. We won't run into supply constraints, they say, because demand will fall before we ever get there. Problem solved! Nothing more to see here.

But think about WHY demand is falling. And remember from Econ 101 that demand, supply, and price are all connected. You can't just pull out one, examine it in isolation, and pretend the other two don't exist.

As oil production from conventional fields started to decline, oil production trended flat, however, demand remained high, and the lever that ties supply to demand is price. So oil prices rose. This allowed industry to develop shale oil that requires high oil prices as a prerequisite. Now industry finds itself in a box with danger on both ends. If prices continue to rise, they will reach a "demand ceiling" with prices higher than market wants to bear. This means demand falls, and prices fall. Leading to the other danger, if prices drop too far they fall below the "profit line" needed for unconventional oil - a line that gets more expensive all the time. It's an increasingly shrinking "Goldilocks Zone" where prices have to stay just right or problems will result.

Demand for oil will drop BECAUSE expensive unconventional oil takes up a larger portion of our annual production.

It doesn't matter why oil production plateaus and declines. It doesn't matter if the reasons are due to geology or economics, as Jeremy Leggett once said "The peak is the peak." And despite what you've heard, "Peak Oil Demand" and Peak Oil are exactly the same thing.

Definitely read Richard Heinberg's article on this. And as you do, think about the extreme rhetorical pretzels people are tying themselves into just to be able to tell the public: "Don't worry, the Peak Oil people were all wrong."