Is oil’s time of peak demand over?

For the global oil industry, it has been a double whammy.

First a foolish price war between two of theworld’s three biggest producers, Russia and Saudi Arabia, drove the price per barrel down from almost US$70 in early January to under US$50 early last month. Theywere fighting each other for market share and theywere also hoping that lower prices would kill off US shale oil, whose production costs are higher.

Then the secondwhammy: the Covid-19 lockdowns that spread across the world last month cut total demand for oil by 30 per cent during the next six weeks. By last weekend a barrel of Brent crude was selling for only about US$20 – there are two oil prices: West Texas Intermediate mainly for US oil and Brent, always a few dollars higher, for the rest of theworld.

Actually, on Monday the US oil price briefly dropped another US$60, to US-$40, because demand has dropped so far below supply that theworld is running out of places to store the excess oil. The producers can’t just pour it on the ground and it’s expensive to shut downwells, so they’ll pay somebody who still has storage capacity to take it away.

This is a problem mainly for inland producers in the US, Canada and Russia, because they are far from the ports where you can still hire supertankers for up to $350,000 a day to store the oil offshore. But that cannot be a long-term solution anywhere, so we are starting to see productive wells being ‘‘shut in’’ (closed down), because that’s cheaper than paying for long-term storage of unwanted oil.

This has two drawbacks. One is even if smaller producers don’t go bankrupt, their leases will cancel quickly if they stop producing oil. The other is that it will be too expensive to reopenmany shut-in wells unless much higher prices return – and if they stay inactive for years, production flow may be permanently impaired.

Last week’s agreement between major oil producers to cut production by 20 per cent by the end of June does not begin to deal with the glut. Global production, at 100 million barrels per day (bpd) last month, will fall to 80m bpd in the next two months, but demand is already down about 70m.

Nor is there much hope in sight. Oil demand may drop further and may never return to pre-january levels. ‘‘This is very reminiscent of a time in the mid-1980s when exactly the same situation happened – too much supply, too little demand, and prices of oil stayed low for 17 years,’’ ex-head of British Petroleum John Browne said.

Peak oil ceased to be a subject for debate some time ago. More countries are committing to net zero emissions by 2040 or 2050, and everybody knows that a lot of oil, coal and gas will be left in the ground. So the topic of concern for the industry is now peak demand – and some industry analysts think that it is already past. ‘‘The virus will bring forward peak demand for fossil fuels,’’ Kingsmill Bond of Carbon Tracker told The Guardian three weeks ago. ‘‘Peak emissions was almost certainly 2019 and perhaps peak fossil fuels as well. It will be touch and go if there can be another mini-peak in 2022, before the inexorable decline begins.’’

So stock market valuations of most oil majors have halved since January and the golden dividends of 20 per cent or more are gone forever. The return on new oil and gas projects is now about the same as wind or solar power projects, so where is the smart money going? Oil is low return, high risk, high carbon: don’t touch it.

And the real question is: What does the decline of oil mean for our civilisation’s prospects for dealing with climate change without a global calamity? That is a subject for another article.