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A fundamental threat to oil

GLOBAL oil demand will peak within six years, says an influential energy analyst. Forecasts of relentless consumption growth in China are wrong, claims Peter Tertzakian, head of Arc Financial, an energy-focused private-equity firm and an authority on global energy markets. And oil's dominance of the transportation market will be eroded by the growth of alternative energy sources

It is a combination that should shock companies and countries that assume GDP growth will always equate to rising oil demand.

As oil consumption has tapered off in the rich West, producers have increasingly focused on the expanding economies of Asia and the Middle East, where consumption continues to surge. But even Chinese demand will reach a plateau within three to five years, Tertzakian says.

Last year, the International Energy Agency (IEA) forecast that total global energy demand would rise by as much as 40% in the next two decades, to 16.8bn tonnes of oil equivalent (PE 12/09 p25). And developing nations would account for almost all of the increase – 40% of the demand growth would come from just two countries: China and India.

For now, China's oil consumption has resumed its seemingly relentless rise. In March, demand was up by just under 13% compared with a year earlier, according to official data. In January, consumption grew by almost 30%, an "astonishing" rise, says the IEA (PE 6/10 p20).

Yet this growth is probably temporary; Tertzakian tells Petroleum Economist that another price shock, as a bullish market pushes the crude price past $100 a barrel again, would combine with worries about the environment and the sustainability of imports to cause a slow-down in China's demand growth.

A shift in Chinese consumption would follow a trend well under way in the West. The developed world crossed its oil-demand "break point" in 2006-08, says Tertzakian, even before oil prices reached their apex close to $150/b and the global economy began its contraction. Tertzakian coined the term in his 2007 best-seller book A Thousand Barrels a Second and used it to describe the moment when a dominant form of energy is displaced by another. Higher oil prices in the coming months, as well as events such as BP's oil spill in the US Gulf of Mexico (see p4), will propel oil more rapidly towards this break point, even as Western economies recover.

But it is the imminence of such a shift in consumption in the developing world that will worry oil producers. An assumption of continuous demand growth as these economies expand has underpinned the strategy of many exporters.

"It will happen very quickly," says Tertzakian, also the author of The End of Energy Obesity. "Oil will become much less of a growth fuel." As the developing world undergoes its own demand shift, prices will settle in a range between $60/b and $80/b, leaving crude to become a traded commodity once more – not a financial asset.

Such a transformation will also probably be permanent. Unlike the 1980s, when an oil-price-induced global recession flattened commodity markets for years, cheaper oil will not stimulate a rapid uptake in demand. Then, few alternatives existed. Now, says Tertzakian, they do. Expect "fourth generation" biofuels by 2015, he says: genetically modified green feedstock that can be grown and refined on site. Other disruptive technologies, including electric cars, are also just a few years away and many of them will grow even more rapidly in developing countries than in the West.

Such forecasts explain what appears to be a strategic shift by many firms from oil to natural gas (PE 3/10 p2). Shell now says that by 2012 more than half of its output will come from gas. It recently spent $5bn to buy a shale-gas firm, East Resources, with access to choice acreage in the US. Almost all of the projects ExxonMobil brought on stream last year were gas-related.

These companies, and many others following a similar strategy, see natural gas as the future – and for good reason. The abundance brought by new discoveries in North America has dampened global gas prices. But that will not last. Global demand for the fuel will grow at about three times the rate for oil over the next two decades, says the IEA. Some analysts claim even that forecast is too conservative, pointing to China, where demand growth is limited only by insufficient import infrastructure – a temporary hindrance. The world is growing gassier.

And the history of energy consumption suggests the process is nigh on inevitable. The first thing societies needing energy do is dam their rivers, says Tertzakian. Then they dig for cheap coal. Economic growth brings transportation and the need for oil. The process ends with renewable energy and natural gas.

And it will happen far more quickly than the producers expect. The prospect of peak oil spooked the global economy during the great bull run of 2008. Now the producers face a different problem: peak demand.

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