A new kind of ‘peak oil’

Few investors can have missed the debate over peak oil'. As emerging markets consume more energy, prices will inevitably rise because all the cheap oil has already been found, making it hard to boost production. Or so the theory goes. But now there's talk of a completely different kind of peak for oil: in demand, rather than supply.

For now, there's certainly no sign of a supply squeeze. The boom in US shale oil production last year overall output reached a 17-year high along with rising output in Iraq, Libya, Canada and Saudi Arabia, "has left the theory about an imminent peak in global oil supplies looking a little premature", says Javier Blas on FT.com.

On the demand side, the shaky global economy has tempered appetites. In China, March imports were down by 2.1% year-on-year. US demand is now the weakest since 1996. Europe's recession has also prompted forecasters to trim their global demand estimates for 2013.

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And global demand is likely to top out by the end of this decade, according to Citigroup's commodities team. This is because gas is now such a cheap alternative to oil, thanks to the supply surge caused by the shale drilling boom. Environmental concerns are also encouraging the substitution trend: gas burns more cleanly than oil.

In 2010, says Citi's Seth Kleinman, cars accounted for 22 million barrels per day (mbpd) of global demand, out of a total demand of 87 mbpd. But cars are becoming around 3%-4% more fuel-efficient every year as governments become stricter about fuel economy and fuel subsidies dwindle. So that reduces overall oil demand.

Other sources of demand, including lorries, aircraft, ships, railways and power stations, are using more and more gas rather than oil. In America, for instance, the delivery fleets of UPS and FedEx, Warren Buffett's railway BNSF, and various firms' drilling rigs have all switched to gas. In China 8% of the heavy-duty lorries sold last year ran on liquefied natural gas.

"The change in fuel economy [in new vehicles] is enough to significantly cut the expected growth in global oil demand," concludes Kleinman "and... oil prices." But "when you add in the shift from oil to natural gas, it should be enough to stop the forecasters of another boom in oil prices in their tracks". By the end of the decade, oil prices "are likely to hover within a range" of $80-$90 a barrel.