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The term "peak oil" has been floating around for decades and refers to a theory about the point in time when the amount of oil that can be physically extracted peaks, which is then followed by an irreversible decline in production. So far, this peak event hasn't been reached on a global level.
Historically, it was thought that a secular decline in oil production would be caused by eventual depletion of known reserves, however, a new theory has recently been proposed. It states that reductions in the actual demand (or global use) for oil may reduce the price of oil relative to the cost of extraction. This can largely be attributed to an increased deployment of clean energy technologies to reduce carbon emissions.
With this new thinking in mind, Andriy Yastreb, Vice President, Portfolio Research, and Raja Karla, Vice President, Investment Grade Credit Research, of TD Asset Management Inc. (TDAM) authored an article titled Will peak oil ever happen? In the article Andriy and Raja discuss the dynamics behind determining the peak price of oil including the impact of electric vehicles (EV), the demand for and supply of oil. Some of the key messages include:
- The impact of EV's - EV euphoria took over the auto industry over the past several years, today however the hype is dwindling. EVs have won over the early adopters, but the vast majority of consumers aren’t quite ready to follow.
- Demand for oil – We feel oil demand will likely peak in the next 5-10 years and major oil producers forecast that oil demand will likely peak by 2030. Thus, major oil producers are gradually pivoting capital expenditures toward integrated gas and lower carbon technologies.
- Oil supply - From an oil supply perspective, in the near- to medium-term, we have a rather balanced market where OPEC has enough control to smooth fluctuations and keep oil prices rangebound – at a high (but not too high) level of around $80. However, growth outside of OPEC and the U.S., particularly in offshore Latin America, Africa and Asia as well as growth in shale production outside of the U.S. risk oversupplying the oil market longer term, especially if energy transition indeed results in peak oil demand around 2030.
The sweet spot for oil
Energy transition is not a buzzword or a flavour of the month - it is real and growing. The popularity of EVs will likely continue to grow. The demand for oil will have to peak at some point and will decline, but the reality is that we will be using oil for a long time, which is why the goal is to get to a "net" zero. On the supply side, there is no shortage of oil in the ground and observers need to be mindful of OPEC actions. A $70-$90 oil is a sweet spot that is acceptable to both producers and consumers and oil is likely to stay range-bound. Investors just need to keep in mind that in the world of commodities, things always change.
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