In 1846, the US was the behemoth of the whaling industry, with Nantucket Island and New Bedford, Massachusetts its twin capitals. Demand for whale oil, as industrial lubricants or as fuel for heating and lighting, had driven the growth of the whaling industry by a factor of fourteen since 1816.
New Bedford had the highest per capita GDP in the world. Yet within two decades, the industry that had contributed over $227 million per year to the GDP of the US (when adjusted for inflation) was dying. Growing demand from Europe first for coal oil and then kerosene replaced demand for whale oil. New Bedford diversified to textiles and light industrial manufacturing thanks to its easier access to railroads, while Nantucket collapsed as its population moved ashore as whaling expeditions declined.
Over a century later, the global energy and transportation industries are having a fierce debate on whether a similar structural change is at hand in the oil market. Though today, the geopolitical consequences have expanded globally.
Overall, the transportation sector accounts for about 60 per cent of global oil demand and current total oil demand growth projections range between 1-1.5 per cent per year. Yet 80 per cent of that projected growth is projected to come from Asia, and major policy initiatives to promote electric vehicles and other modes of clean transportation to meet climate, pollution, and energy security goals and become market leaders in new technologies, could significantly impact future oil demand. Innovations in heavy transport and aviation, though not yet commercially viable, are on the horizon and could also dampen demand for oil as a transportation fuel.
The uncertainty in the technology and its rate of adoption, questions about the commitment to the policy interventions driving much of the change, and projected increases in oil demand from the petrochemical and other sectors have driven the debate about the likelihood and timing of peak oil demand. Statoil and BP have projected that demand for oil could peak somewhere in the mid-2030s or 2040s, respectively. But Aramco CEO Ameen Nasser said in April that peak demand was “equally as misleading” as past theories about peak oil supply, while Chevron and ExxonMobil, the two largest US oil companies, conclude that peak demand is not in sight.
Despite the uncertainty, it is at the very least plausible that, with continued technological advances and policy support, oil demand will peak in the not-too-distant future — though the timing, pace, and severity of this peak remain in question. In aggressive scenarios, the potential geopolitical and geo-economic consequences of this prospective peak are extraordinary.
Government budgets of major oil producers would be squeezed, competition for manufacturing leadership in electric vehicles and other new markets would alter trade flows, and traditional great power dynamics could gain new, perhaps sharper, edges.
Most likely, the changes would be gradual. In the short-term a shift to short-cycle plays such as US shale is underway as companies and investors look to minimise risk as they develop a better understanding of the changing medium-long term dynamics of the oil market. The investment climate for big, long-term projects such as deepwater and Canadian oil sands where returns are measured in decades has already been undermined.
As demand declines and prices drop, we could see a marked shift to low-cost producers who take advantage of a longer tail of oil consumption. Yet even among relatively low-cost producers, countries that are too dependent on oil revenues to withstand lower prices or diversify into other sources of income will face increasing economic and budgetary challenges. This in turn could weaken stability in the Gulf, or force Russia into greater risk-taking in its foreign policy.
This said, a structural shift in oil demand would not only produce losers. Oil importing countries have already seen significant advantages even in the mildest of oil demand change scenarios.
Revenues traditionally reserved for oil could be used for investment in new technologies, accelerating the transition away from oil while allowing new countries to firmly claim leadership in the new energy economy. For example China, a leader in EV production and adoption, has considerable deposits of the critical elements needed to produce batteries such as lithium, cobalt, and aluminium.
The record of even informed predictions in the oil market is poor but it is clear, however, that the energy mix and the levers of global oil demand are changing, and geo-economic and geopolitical changes will follow in turn. We would be wise to take note of which of these levers are most important, keeping a keen eye to the possibility that the changes on the horizon are even more dramatic and geopolitically significant than those seen on New England coast over a century ago.
The writers are with the Global Energy Centre at the Atlantic Council.