We can think of five different stories that may bring about

a decline in oil demand. The first three are based on an increase in prices
for different reasons. The first reason might be
that the producing countries, the exporting countries limit deliberately their
production in order to increase prices. This is something that they have been doing
at different times, and they may continue or insist, or even increase this tendency
to limit supply in order
to maintain higher prices. This is a policy
that has a chance to succeed in the short term
because prices will be higher. But in the longer term, it has the consequences
of discouraging demand. Consumers will become
convinced that oil is more expensive and will
never become cheaper again, and therefore, they will move
to diversify away from oil. This is what people call
demand destruction. If there is demand destruction, then it is possible that we
have a peak in oil demand. A second possibility is that international oil companies
may become discouraged about
the future so to speak. They may become convinced that there is no future
in investing in oil because oil demand needs to
peak and needs to decline. So because of their belief that the climate change
targets
will be achieved, they may, in fact,
limit their investment. This is what they are expected
to do by many people. There are environmental lobbies, ethical investor lobbies
that are exercising pressure on the
international oil companies to unilaterally limit their
investment in exploration and production of oil because the use of
oil must decline. If the international
oil companies do this, then the supply of
oil will, obviously, be equal decline or
be less abundant, and this will bring
about higher costs for oil, higher prices for oil, and demand subsequently may be,
so to speak, forced to decline. A third possibility
is that governments intervene and impose
a carbon price either through a carbon tax, as we have discussed already, or an
emission trading system. In one way or another, they may intervene and increase the
price of oil
through this mechanism. In fact, the imposition
of a carbon price would not affect oil
first and foremost. It would rather affect
coal much more than oil. Oil is not very severely affected by the introduction
of a carbon price. But nevertheless, we may
assume that carbon price high enough is imposed,
and therefore, the cost of oil is increased and consumers decide to shift away from
oil and
demand less of it. So we have three stories
based on higher prices, either because of action
from the producers, or action from the companies in action from the company's
failure to invest, or finally, because of action from the government and the
imposition of a carbon price. In all these three scenarios, it's price that drives
a decline in demand. Then, there is another scenario which could be based on
technological change. This is what some people call a Kodak moment for
the oil industry. It refers to Kodak which used
to produce films and when digital cameras emerged people were taking pictures and
are taking pictures, many more pictures than they
used to take in the past, but they need no film. So Kodak has lost the market, not
because the field
was too expensive, but because something new
has come to the fore, a new technology which is just simply superior to
the previous one. It's much more convenient and
so there is no competition. People believe that the advent
of electric cars may cause a Kodak moment because they believed that electric cars
are absolutely superior to
internal combustion engine cars. The International Energy Agency has explored this
possibility. While in the New
Policies Scenario, they have an assumption
that by 2040, there will be 300 million
electric vehicles on the road on a total of approximately two billion
cars worldwide. They have an alternative scenario called the future is electric, in
which they assume that a billion or more cars
will be electric. So slightly more
than 50 percent of the total car fleet
in circulation by 2040 will be electric. It is indeed very difficult to imagine how
this could
come about because the difficulty of producing
this number of cars and the speed of penetration
would be astounding. But let's assume that
this may happen. What is interesting is
that the conclusion of the International
Energy Agency is that, even in this case, we would not really have much
of a peak in oil demand. We would have rather stagnation. There is a difference
with respect to the other scenario
and, of course, this difference would become wider more important
down the road. But nevertheless, oil
demand would hardly be even in this
scenario envisaging, so to speak, a Kodak moment
for car transportation. The final possibility
is that governments, at least some governments, step in and limit oil demand
through a variety of possible
administrative measures. Stuff like imposing that
from a certain date on, only electric vehicles will
be allowed to be sold, and possibly even from
a certain date on, only electric vehicles will
be allowed to circulate. Such impositions,
non-market mechanisms, but administrative measures
would certainly necessarily cause a decline in oil demand at least in
the transportation sector. But if all other
things are equal, this would cause a decline
in price as well. If not all governments
share the same policies, which is highly likely because not all governments
will follow this path, then they'll lower
prices of oil will encourage higher demand
elsewhere in the world. So it is not clear that even through the imposition of
administrative measures, oil demand might be
expected to peak. It depends on how many countries, how many administrations would
follow this line of behavior. So the conclusion is that it is really difficult to
come up with
a convincing narrative, envisaging in oil demand
peak before 2040. After 2040, I do
not dare to discuss because technological
progress may change the situation again, and so it is not to
be denied that there is a possibility of demand
peaking after 2040. But in the meantime, it is likely that
investment in low cost and especially low
carbon oil resources is likely to remain profitable. So people will be attracted to
investing in exploration
and production for oil if the cost
of producing is low. Also, it is possible that prices will be
above marginal costs, so profit will be made
in producing oil.