A new report released today by management consultancy Arthur D. Little questions the energy sector’s consensus view that demand for oil will rise ever higher, driven in particular by consumption in the BRIC countries. Instead, it envisions that, as a result of an anticipated public policy shift, oil’s predominant share in the energy mix could diminish faster than the industry currently anticipates.  In contrast to a widely held industry consensus that, for the foreseeable future, oil will retain its leading role in satisfying ever growing global energy demand, a new analysis by Arthur D. Little offers an alternative scenario in which the global energy market transitions more quickly away from oil and towards a new, post-hydrocarbons, energy era.
In “The Beginning of the End for Oil?,” Peter Hughes, a director of Arthur D. Little’s Global Energy & Utilities Practice, points to three converging global policy drivers that are likely to bring about major changes to energy policy in all of the major energy-consuming areas; and could result in an earlier than anticipated decline in demand for oil.  Climate change, politically undesirable price volatility, and questions of security of supply are all driving new public policy measures, and may well reduce the role that oil plays in the global energy mix sooner than many expect.
“In the last year, oil prices have reached record highs – and also been their lowest in four years,” Hughes observes. “The penny has dropped.  To varying degrees, governments across the globe are acknowledging publicly, many for the first time, that decreasing reliance on imported oil – and quickly – is becoming an energy policy imperative.”
Changing composition of oil demand
According to Arthur D, Little’s latest report, of the fossil fuels, oil is particularly vulnerable to a future decrease in demand because of the dominance of the transportation sector in its demand structure, consuming as it does over 50 per cent of oil produced worldwide today.  The long-standing lack of alternatives to oil for transportation fuel has underpinned its dominant position, but this is now threatened by a series of global policy initiatives driving technology innovation and fuel efficiency across the automotive sector.
Hughes suggests that:
“As the number of new policy measures implemented to reduce reliance on hydrocarbons for transportation fuel reaches critical mass over the next 5-10 years, the world could see downward pressure on demand for oil and oil products materialize much sooner than the industry would currently concede.”
The report argues that within both OECD and BRIC markets, the drive to increase fuel efficiency and reduce oil dependency will begin to develop real momentum and lead to a relatively rapid shift to alternative, non-oil-dependent modes of transport.
According to Hughes, “Depending upon how quickly the transportation sector begins its migration away from oil dependence, we could find ourselves at a tipping point in which demand for oil peaks much earlier than the industry currently anticipates, before going into long-term decline.”
Implications for the future energy mix
As peak demand for oil approaches, the implications for coal, natural gas, nuclear, and other alternatives to hydrocarbons are far reaching.  According to Arthur D. Little’s report, oil and gas companies should give renewed thought to the sustainability of their business models, and among other things consider accelerating their moves to spread themselves into other parts of the energy value chain.
According to Hughes, “As oil and gas and other companies think about the longer-term energy mix, I would expect a great deal of focus to be on electricity as the vector for delivering useful energy to consumers.  This has implications throughout the energy sector, and will create demand for multiple new sources of clean power as well as the infrastructure to deliver it.”
With the real possibility that oil demand will peak much sooner than industry consensus suggests, Hughes concludes: “We encourage companies across the energy sector to build a revised concept of long term oil demand into their vision of where they want or expect to be in 20 years time.  With the lead times that exist in this business, it cannot be too soon for companies to begin to re-focus their investment and long term growth strategies to ensure sustainability in the transition to a post-hydrocarbon world.”
The Beginning of the End of Oil? is now available for download at
www.adl.com/peakoil.