This week I will deliver the keynote address at the annual Uintah Basin Energy Summit in Vernal, Utah. I am going to tell the audience a story that regular readers have heard in bits and pieces. Today, I want to share a portion of my presentation. 

The gist of the talk will be to review how we got to $50 a barrel (bbl) oil given the widely-held outlook of oil shortages just a few years ago. First I am going to take the audience back a decade when “peak oil” was all the rage.

For those who don’t know, almost from the beginning of the U.S. oil industry, there were those who suggested that it wouldn’t be long before oil production began to inevitably decline. The layman’s understanding of “peak oil” typically boiled down to “The world is running out of oil.”

But the real concern wasn’t that the world was going to run out of oil, it was that oil production would begin a long decline and cause havoc in a global society that is still highly dependent upon oil. 

Modern civilization has never functioned without oil, so many prognosticators argued that peak oil necessarily meant dire consequences. Books were written on the concept. Credible voices stated that oil production was nearing terminal decline. Here is one of my slides highlighting some of the media coverage of “peak oil” from a decade ago:

Notably, the story on the left is a discussion with the late Matt Simmons, who was one of the loudest voices calling for peak oil in the near future. In that 2008 article, he argued that there were no answers to the peak oil problem. Former Shell (NYSE: RDS-A) CEO John Hofmeister was quoted in the article suggesting that Simmons was underestimating the potential of unconventional oil resources, only to have Simmons answer that these solutions were too expensive. 

For a while, it looked like the peak oil crowd might be right. Production in Saudi Arabia remained flat even as global demand continued to grow, and oil prices skyrocketed above $100 a barrel (bbl). These were just the types of consequences predicted by the peak oil camp. 

Fears of oil shortages helped support oil prices, and these fears impacted our energy policies. We got higher fuel economy standards, biofuel mandates, and the government threw billions of tax dollars at advanced biofuel solutions like obtaining renewable fuel from algae or wood.

Fast forward a few years, and after falling for nearly 40 years, U.S. oil production began to surge as a result of the marriage between hydraulic fracturing and horizontal drilling. The upturn took place starting in 2009 — the year after Matt Simmons told The Economist that there was essentially no hope. Oil proceeded to grow at the fastest rate in U.S. history, which should be a lesson for those confidently predicting the future. 

It turns out that high prices can indeed enable a lot of new oil production, which was perhaps the biggest blind spot among the near-term peak oil adherents.

OPEC was plenty happy with $100/bbl oil, so they were slow to add new oil supplies to the market. In fact, they failed to do so until the threat from shale oil was abundantly clear, and then they dumped millions of barrels of oil into a market that was already oversupplied.

Prices were already falling, but OPEC put them into free fall by adding more oil to the market. They contributed to a significant crude oil inventory overhang, which sent prices tumbling and from which we are still recovering.

Having failed to learn our lesson from those “certain” near-term peak oil predictions, today we are swamped with media coverage suggesting “peak demand” is here. How does this differ from peak oil? Peak demand is the idea that oil demand will fall as people turn away from oil in favor of alternatives like electric vehicles (EVs).

Unlike the peak oil scenario, peak demand would mean that oil prices would remain low. But like peak oil, there are again plenty of prognosticators who are predicting it.

The reality is that earlier this summer the International Energy Agency said that global oil demand is accelerating, and they raised their 2017 global crude growth demand forecast to 1.5 million BPD. 

I will finally show a slide showing that oil demand grew in Norway and California, despite the explosive growth of EVs in both locations.

My conclusion is that this problem is more complex than many of the peak demand proponents assume, and close with this:

Summary

In my presentation, I plan on taking the audience on a tour of the past dozen years of the oil cycle. I will argue that peak oil fears kept oil prices inflated for longer than they should have been, and peak demand concerns today are helping to weigh down oil prices.

My conclusion is that peak demand scenarios are overstated and unlikely to happen anytime soon. This is relevant for you as an investor, and it will be welcome news for many of the oil producers in the audience. 

My last bullet point is a reminder of the dangers of failing to combat the peak demand narrative with facts because it could lead to underinvestment in the sector if there is a widespread belief that oil demand will begin to decline soon.