Peak Oil Is Here. Well, Maybe
“I think there’s a fairly straightforward path to getting rid of about 50% of oil demand,” Bloomberg Opinion’s David Fickling says on the latest episode of Zero. Bloomberg Opinion columnist David Fickling has joined Akshat Rathi on this week's Zero to discuss peak oil, suggesting that as we transition to clean energy, the potential for this link to be broken depends on the rise of clean energy. He argues that oil demand has been a proxy for economic growth since industrialization began, and that it could be broken if clean energy replaced it. This article also discusses the impact of climate change on the global economy, as well as the impact on global emissions. Fickled argues that even oil majors, who insist on investing in fossil fuels, are funneling money into lower-emitting initiatives, such as Saudi Aramco. The International Energy Agency also suggests that getting rid of about 50% of oil demand is a straightforward path.
Publié : il y a 2 ans par Christine Driscoll, Oscar Boyd, Akshat Rathi dans Environment
Since the beginning of industrialization, growth in oil demand has been a close proxy for economic growth. Now, as we transition to clean energy, there’s a real prospect of breaking that linkage. But when the link will be broken depends on the rise of clean energy — and, to some degree, it depends on who you ask.
“If you're talking about structural decline in oil demand, until very recently, you were talking about structural decline in the global economy,” says Bloomberg Opinion columnist David Fickling, who joined Akshat Rathi on this week’s Zero to discuss peak oil. “I don't think we are talking about that now. Because we do have these quite effective substitutes.”
Last year, Fickling wrote a column that declared: “Peak Oil Has Finally Arrived. No, Really.” Although his thesis came with important caveats — Fickling is talking specifically about crude oil and specifically about oil demand — he isn’t the only oil-watcher who believes the black goo is headed for structural decline. The executive director of the International Energy Agency says so, too. “I think there's a fairly straightforward path to getting rid of about 50% of oil demand,” Fickling says on Zero.
That’s welcome news for the climate. Burning oil contributes about a third of global emissions and getting to net zero will require weaning humanity off of it. Even oil majors, while insisting the world continue to invest in fossil fuels, are funneling money into renewables, hydrogen and other lower-emitting initiatives. “If you actually break down what Saudi Aramco is spending,” Fickling notes, “a surprisingly large amount of it is actually going on energy transition projects.”
On this week’s Zero, Fickling joins Rathi to talk about where oil demand is falling fastest, how to know when peak oil has arrived and what happens after that. Listen to the full episode and learn more about Zero here. Subscribe on Apple and Spotify to stay on top of new episodes.
Our transcripts are generated by a combination of software and human editors, and may contain slight differences between the text and audio. Please confirm in audio before quoting in print.
Welcome to Zero. I'm Akshat Rathi. This week, peaks, politics and predictions.
Today we are going to talk about oil. Whether you love it or hate it, you cannot deny that the world needs it… at least right now. And if you care about tackling climate change, then you also need to care about what happens to the demand for oil over the coming decades.
Growth in oil demand has so far been a close proxy for economic growth. While it’s clear some of that economic growth and the energy that powered it has been responsible for climate change, that growth has also pulled hundreds of millions of people out of poverty.
As we transition to clean energy, there is now a real prospect of breaking that linkage.
If you're talking about structural decline in oil demand, until very recently, you were talking about structural decline in the global economy. I don't think we are talking about that now. Because we do have these quite effective substitutes, and they're becoming more effective by the year
That’s David Fickling, a columnist for Bloomberg Opinion and my guest today. He's joining me to talk about peak oil.
In a matter of mere decades, the world has gone from the specter of running out of oil to soon being able to choose not to extract every last drop. Or to put it another way, the world has gone from watching for the day that oil supply peaks to trying to predict the day when oil demand peaks.
All this matters because burning oil contributes about a third of global emissions and getting to net-zero will mean finding ways to wean the economy off this still essential commodity.
There’s also the tiny matter that oil commands the most attention in global geopolitics among all other commodities. What happens to the major oil powers once the world starts wanting less oil?
This week is a good time to talk about it because it’s the 50th anniversary of the OPEC oil embargo 1973, and those powers showing how much of a stranglehold oil can have on the global economy.
The oil producing countries of the Arab world decided to use their oil as a political weapon. They will reduce oil production by 5% a month until the Israelis withdraw from occupied territories.
As expected, there was a huge reaction in countries like the US.
Archival News Tape 02:33
This is a Pearl Harbor again as far as the United States is concerned because of the fact that it envisions a whole change in our lifestyle, a whole change in the way this country has been built
All that happened because Arab countries were opposing Western countries’ support for Israel in the 1973 Arab-Israeli war. It’s tragic that almost to the date the region is experiencing yet another war and yet another humanitarian crisis.
Back in 1973, oil-producing nations could use oil as a weapon because supply was an issue. Now, David predicts that demand is going to be the issue. That is, the day humanity can say, dear oil, it's not you, it's me, is on the horizon.
In fact, last year, David wrote a column where he said, “Peak Oil Has Finally Arrived. No, Really.” So I invited David to come on the show to help me understand why the world cares so much about peak oil, why he still thinks his prediction is the right one, and to explore the truly wild world we will enter after oil demand peaks.
David, welcome to the show.
This is an interesting week to talk about what we are going to talk about, which is peak oil. It is the 50th anniversary of a pivotal week in energy history. I'm talking about the 1973 oil crisis, which began on the 17th of October. So can we just start there as a moment in time which changed the world and bring it to a point where you feel peak oil is a thing that people started to talk about?
Absolutely. I think something we're going to talk about throughout this conversation is about the interplay between supply and demand. The 73 oil crisis, and also the 79, one, which in some ways, had a more lasting effect, provoked by the revolution in Iran. Obviously they were events in the history of oil supply, but they had immense consequences on the history of oil demand. If you look at oil demand projections in the early 70s, before 1973, through the 50s and 60s, energy demand was increasing at a rate that looked almost exponential. You had these very dramatic projections about how fast demand for energy and in particular oil was going to go up over coming decades. And that trend was broken by 1973. And for obvious reasons, supply and availability of oil suddenly looked less secure. And so consumers had to start rethinking a lot of the things that they were doing. The most obvious example of this was that, in 1973, about a third of the world's oil went to fuel oil: boilers. It was producing electricity. That is now about 7% of the world's oil. The world has given up on that, because essentially, after 73, European economies, a lot of the US, they turned to domestic coal reserves instead. France turned to nuclear, of course, famously. And we saw the birth of a lot more investment in renewables, although at that stage, it was it was far too early stage. But what we saw was that when you have a supply problem, demand starts to respond. And that's been a lesson that continues for decades.
So in initial days, you know, this is talking from the 1970s era, when the term ‘peak oil’ it almost always meant peak oil supply. But today, we're talking about a very different kind of peak oil.
Yes, absolutely. I mean, in fact, if you look at the projections for peak oil supply, they go back even further than that. At one point, I remember looking at this, in 1919 the Chief Geologist of the US Geological Survey, said that US domestic output — no one was even projecting anything on a global basis at that point, but they said that within two to five years, US oil production was going to start declining. And at that point, it was about 1 million barrels per day. It's 13 million barrels per day now, more or less.
Whether it’s in the case of supply, or it's in the case of demand, why is it that we care so much about peak oil?
If you look around, you can see how important to us oil is in all sorts of ways. From a consumption point of view, obviously, the cars we drive, the consumer products that we have, oil is in a vast array of uses. It's not just cars, it's the trucks that drive things, the planes that we fly, the ships that move things around. Also, plastics and consumer goods that greases the asphalt on the roads, it's everywhere. Of course, from the climate perspective, oil is one of the largest contributors to climate change. And that's something that we need to reduce. So before when we were worried about peak oil supply, we were worried ‘gosh, we're not going to be able to have all these useful consumer goods that oil provides us.’ We're less worried about that now. We're more worried about the fact that oil is actually destroying the environment around us. We are concerned about ways to substitute and reduce. And substitution is the thing that's really changed in this area when we're talking about peak oil demand. There are alternative ways of doing the things that oil does, for instance, electric vehicles, biofuels in conventional vehicles, and alternative feedstocks like hydrogen for the chemicals industry. And that's what's changing at the moment.
So you published a bold article last year, but it started with sort of a trepidation.
That said, I'm going to make a bold claim, and I may come to regret it. But my bold claim is that peak oil demand is here. Twelve months on, tell us why you thought peak oil demand is here. And do you think you're still right?
Sure. Well, yeah, I mean, the main reason I wrote the column at the time was that it was a period of very sharp tightening by the US Federal Reserve. And at that point, everyone was predicting that the world was going to face quite a severe global recession, really on the scale of the Volcker recession of the early 80s. This was when Paul Volcker, the US Federal Reserve Governor tried to stamp out inflation in the wake of the 1979 oil crisis during the Iran-Iraq War. And that's one of the most dramatic reductions in oil demand that we've seen in history. The argument I made at the time was essentially that if we saw a recession on that scale, that was probably going to crimp oil demand until the mid 2020s, sort of 2025. And at that point, we’d start to see some of these long term factors like rising energy efficiency and vehicles and the rise of electric vehicles mean that oil is entering a secular decline. Now, there has not been a global recession. In fact, the global economy has grown extremely strongly, we're really sort of above trend growth. However, the specific prediction I made was about crude oil.
So let's do that. Because it is…nerdy. Beyond the fact that we can make these pronouncements about peak oil, oil is not one thing. We think of it as a commodity, but it's not one thing. Let's just break it down and then explain to us where you think we have reached a peak.
If you think about how you measure oil, it's actually quite a difficult thing to measure oil demand. And you can go right back to the 19th century, John D. Rockefeller and Standard Oil. John D. Rockefeller was not controlling oil fields, oil supply. He controlled refineries. And refineries are the bottleneck in the global oil supply chain. So if you want to count how much oil is being consumed, the best way to do it is to go to the gate of a refinery and measure how much is coming out of the refinery. And so generally, when you hear the OPEC or the International Energy Agency saying, like, what is the level of oil demand? Essentially, what they're saying is how many barrels are coming out of oil refineries.
David is making an important distinction here. When measuring oil consumption, organizations like the International Energy Agency and OPEC are not counting what’s going into the refinery but what’s coming out.
For much of history, refineries took in pretty much only crude oil, so the amount of refined products was a good proxy for the amount of oil coming out of the ground.
That’s changed over the past few decades, and now refined products come not just from crude oil, but also biofuels and natural gas liquids. And because a barrel of refined products can be made from more than one source, it means there can be a significant difference between the amount of crude oil going into a refinery and the number of barrels of refined products coming out.
Global supply of refined products, things like gasoline and diesel and jet fuel and things like that, that's about 100, 101, and 102 million barrels per day. Global supply of crude oil, which is what we think of as oil, black stuff that will fit in a barrel that's subject to OPEC quotas, the stuff that's quoted on the news for the price of West Texas Intermediate, or Brent, that's only about 83 million of those 100 million barrels, probably a little bit less than that at the moment. Crude oil, which was what I made this prediction about, we are still actually below 2018’s levels of crude oil demand at this point. And the International Energy Agency, if you look through their numbers, they don't predict that next year we're going to exceed 2018’s levels of crude oil demand. So at this point, crude oil demand is still below its peak. And there's a lot of headlines you'll see about, ‘we're seeing record oil demand.’ But that's actually largely to do with growth in biofuels supply, and to a similar extent growth in natural gas liquids, not actually in crude oil.
So what you've just said is basically, oil demand as we understand all kinds of product demand, is growing, and is at a new peak. But the black goo that is feeding that oil demand has actually peaked. There is all this other stuff, some of which is actually biofuels, which is the fastest growing segment of supply. Why have biofuels become such a big part of the supply mix?
Biofuels is essentially policy. One of the earliest responses to the 1973 oil crisis was Brazil started introducing very dramatic biofuel mandates from the 1980s. We've added the US to that in the 2000s. In the late 90s hardly any US crops went into making fuel. At this point, more US crop volume goes into making fuel than goes into making food for Americans. It's grown to that extent. And we're seeing other countries moving in the same direction. Just in the past 12 months, India has doubled its biofuel mandate, I think, to 25%, from 10%. Indonesia another big source of transport demand growth has raised its biofuel mandate to 25% and I think is going to 50% in the next few years. These are quite significant slices of oil demand.
So if that is the case, and yes, let's assume the total demand for oil will continue to grow, as many predictions said it will. But if biofuels also continue to grow, why did you feel any trepidation making the claim that crude oil demand has peaked?
I think the reason for that is that every prediction anyone has ever made for this in history has turned out to be drastically wrong. And this is about a series of lines on a chart and the direction that they're moving. And I think, if I can give common ground that really very few people would disagree on, the amount of liquid fuels demand over the coming decade, the pace of growth has clearly slowed. Even oil bulls would agree about that. And so we're on about 102 million barrels a day of liquid fuels demand. You don't see many predictions heading much above say, 105 million barrels a day. And maybe some people do predict that. But that's over the previous decade, I think oil supply increased, liquid fuel supply increased by say 10 million barrels a day. So we're quite close to the peak in that sense. And the question is how much of that peak gets used up by crude oil? How much gets used up by biofuels? How much is natural gas liquids and how much is processing gains? The argument I've made is that biofuels, natural gas liquids, and processing gains… they make up all of that increase in supply.
You might be wondering if having more biofuels in the mix is a good thing for the climate. It's really complicated to calculate how much carbon-saving can be achieved with biofuels.
What most studies agree on is that biofuels aren't carbon neutral. Just because they come from growing food that captures carbon dioxide in the process of growth does not mean biofuels do not have additional emissions. Processing crops into fuel requires energy. Burning biofuels creates air pollution.
That’s why biofuels for road transport isn't a good solution to pursue in the long term. Instead, it's better to focus on using biofuels to reduce emissions from aviation.
There are more people in the world who are buying vehicles. As incomes rise, there are more trucks moving around, people are flying more, there's all those things that are increasing top level demand. But also, every vehicle in the world has been getting more efficient. This is actually not as much about the rise of electric vehicles. It's actually about fuel efficiency rules that have been implemented for about 15 years: Obama era, Fleet Fuel Economy rules, similar rules in Europe, the same sort of standards in China, in India. All of those vehicles, from the sort of pre-2008 era, they are now being scrapped. They're 15 years old, and they're getting phased out of the fleet. And new vehicles are strikingly more efficient. I think if you look at some US examples, a current model car and I have the numbers here in front of me, actually: new US cars now travel nearly as twice as far per gallon as they did at the start of the Obama administration. And that's just normal US gasoline cars. So that is an incremental reduction in oil demand. And it's nothing to do with electric vehicles.
As we know there's an explosive growth in the number of electric vehicles being sold. The total oil demand destruction from all vehicles, not just cars, but buses, and two wheelers, and three wheelers is only about a million barrels a day of oil, so much of the gain, so to speak, from decreasing demand has come from, as you say, efficiency gains.
Absolutely. And so, you know, if you break down the oil barrel, about a quarter of the barrel goes into gasoline, another 30% goes into diesel. And then the remainder, about 8% of it, is actually just the fuel that oil refineries use. About 15% is for shipping and for aviation. And the remainder is petrochemicals, asphalt, that sort of thing. So if you look at those different fractions of the barrel, fuel oil demand peaked way back in 1979. Gasoline demand, according to the International Energy Agency, that peaked probably in 2019, and is already in decline. Road fuel demand as a whole is going to peak in the next sort of four to five years. And of course, Fatih Birol, the head of the IEA, just said last month, that oil demand and here he means not crude oil, he means liquid fuels demand as a whole, that is also going to peak this decade.
Just on a sidetrack here, even as the IEA was born out of the fossil fuel era. In recent years, it's become a lightning rod for all kinds of people, first climate people and now oil people, because every pronouncement it makes today, it makes for massive headlines in energy press. And so this prediction that Fatih Birol made, he used this term which is, all fossil fuels will go into structural decline in this decade. Including, of course, oil. Why is structural decline such an important phrase in there?
I think that is because we have actually seen periods of cyclical oil demand in the past. And this has been driven by these economic factors that we talked about. I mean, essentially, one of the main reasons that people have always been very reluctant to make that call on peak oil consumption, is that oil and economic growth, if you track global economic growth and oil supply, they track almost perfectly because oil has for so long been the best way of producing energy, the best energy carrier. If you're predicting peak oil, it's like you're predicting peak economic growth, which is obviously a disaster for the world. And historically, we've not had the substitutes for oil that we have right now. And I think that is why it's so important, if you're talking about structural decline in oil demand, until very recently, you were talking about structural decline in the global economy. I don't think we are talking about that now. Because we do have these quite effective substitutes, and they're becoming more effective by the year. But that's the difference. We have seen these cyclical declines in oil demand. We saw it in the early 80s. When you had the 1979 oil crisis, you had the Iran-Iraq War, you had the Volcker tightening at the Federal Reserve, we did actually see oil demand decline. But then that decline reversed. If you remember the old 1980s American soap opera, Dallas, Dallas was set in a period of oil decline. It's all about the sort of crises in the Texas oil fields. And it covers that turning point, actually, when the oil market started to reverse and demand started to grow again. Those are the sort of cyclical declines we've seen. We've not seen a structural one. And of course, if you're talking about heading to net zero, a structural decline is the one that you need. You don't want a temporary blip you actually need to decline to decline forever.
One other thing that came out of the 1973 oil crisis was the International Energy Agency, the IEA, and if you want to learn more about it, you can listen to an interview with the current head, Fatih Birol, in our archives. There’s a link in the show notes.
After the break, humanity says to oil, it’s not you, it’s me.
In response to the IEA’s prediction about structural decline in oil demand, OPEC had an interesting response. It said, “it is an extremely risky and impractical narrative to dismiss fossil fuels, or to suggest that they are at the beginning of their end. In past decades, there were often calls of peak supply, and in more recent ones peak demand. But evidently, neither has materialized.” And those are all facts. And yet the tone is an interesting one, a tone that I'd like to explore by just trying to understand what happens after we reach peak oil. Because maybe you're right, that we have reached peak oil. Maybe you're wrong, maybe crude oil demand actually does peak later in the century. However, what is no longer a question of contention is that eventually, the demand for oil will peak. What is more interesting is what happens after?
I think the first thing I would say is what does the liquid fuels sector look like? After peak crude oil consumption? A crucial part of that is, of course, how fast does liquid liquid fuels decline? And I think the best answer is probably not as fast as we would like them to be declining, because of course, you are going to see this decline in transport fuels, which is 50 55% of the barrel road fuels, rather, that's going to accelerate as electric cars penetrate and as the vehicles get more efficient, but of course, you've also got this other 45% of the barrel, which is shipping fuel
And aviation fuel, which we are hearing about in the background.
Yes, right over my house. But yes, you know, 45% of the oil barrel 15% of it is shipping and aviation fuel. Shipping fuel is actually quite an interesting one. We're seeing quite a rapid change in the engines of ships being built with alternative fuels, which is the biggest change in shipping since Winston Churchill turned the British fleet to oil in 1910, 1912. That's a dramatic change. That's only about 8% of the oil barrel. 7% goes to aviation fuel. There is a lot of talk in the industry about the growth of sustainable aviation fuel from biofuels, I'm quite skeptical about that. I think we are likely to see aviation fuel increase quite a bit. Plastics is the other thing, I think we'll probably see plastics increase quite a bit. So really, what we're talking about is the decline of the road transport fuel bit of the barrel, I think there's a fairly straightforward path to getting rid of about 50% of oil demand. Beyond that, it gets quite a bit more challenging. And of course, we've seen with the energy transition, that the world is quite good at coming up with solutions for the next sort of slice of emissions that we need to reduce.
And so we really haven't started thinking about the 45% of the barrel and how to tackle it. And there is hope given when we come to a problem, we typically do find solutions. It's starting to happen in the cement sector, in the steel sector. But it leaves behind a very crucial question about what happens after which is to do with geopolitics. And that would mean only the places that can produce a low cost barrel of oil, which is typically Middle Eastern producers, will be the producers producing most of the oil. That means as a share of the global supply, their weight becomes bigger, and they can use it as a geopolitical weapon. How do you think about the Middle Eastern countries in an era of peak oil demand?
I think that is right. I think if you look at things like cost curves, which is what the industry uses to work out who's most profitable, as you say, the Middle East is at the bottom of the cost curve, it's the most efficient. So a lot of projections I've seen, OPEC increases its share to about 50% over the coming decades, which is at this stage, it's about 30%. So it's quite a significant increase. One thing I'd say, though, about geopolitics is that the real power of OPEC and the Middle East within geopolitics is about gasoline, and the crucial importance of gasoline as a consumer product that affects people's feeling of well being and their political views and whether Joe Biden is going to win the 2024 election and all sorts of factors like that.
Oh, that's very interesting. So you are saying in a world where oil demand peaks and gasoline is not the hot topic that a US president won't get elected if the price of a gallon is at $5 versus $4. In that world, a barrel could be $200 a barrel, and will still not make a difference?
Well, absolutely, I think it depends on the share of the population and the pivotal political importance of that share of the population who are using gasoline cars. But I think if you look at a couple of other countries, China, for instance, is an unusually non oil dependent economy.
Today, it wasn't the case five to ten years ago.
Yes, but actually, compared to the US, China is much more dependent on oil imports, which you would think would make it very vulnerable to this. But of course, China also doesn't have to worry about democratic elections and the effect of that, but certainly, there is not a sense of impending crisis that the government needs to repair when oil prices go up because most people are much less exposed to oil prices than they are in the US. One area that the US is quite unique is that the consumer is unusually exposed to OPEC decisions, basically. So most of the world is not as exposed to the volatility in oil prices as US consumers are.
Right. How do you think geopolitics will play out? In an era where demand for oil has peaked, and the political connections of gasoline prices in the US are broken.
I think, as a subject that affects political outcomes to voters, I think it'll clearly break that. But I think one area where we'll see the geopolitics being surprisingly resilient, is actually about US involvement in the Middle East. And obviously, we're quite aware of this right now. Because we have a war going on in the Middle East. And I think there is a tendency, and you see this in US politics, particularly in this era, when Saudi Arabia is becoming much less friendly to the US, you see a lot of people in America going, why are we so invested in the Middle East? Why are we so involved in the Middle East there, they don't share our interests, most of the oil from the Gulf goes east, goes to China. And our Navy is basically providing security detail to for China's oil, why don't we get China to do it itself? And this is a growing groundswell of opinion, we see this. And actually, if you think about it, it's quite easy to see why the US is probably going to want to maintain that geopolitical setup in the long term. They do not want China to be providing the security detail to gulf oil heading east, because regardless of what happens with transport fuel and road fuel, oil is also going to remain a pretty crucial war fuel for a long time to come. The military is going to be one of the last to give up oil as a transport fuel. Now, if China is providing security detail for oil heading to Asia, that's going to have implications for all the other big oil consumers in Asia, that's gonna have implications for Japan, South Korea, for Taiwan, and for all these other allies. And that's going to upset them a great deal. As a result, I think if you look in the long geopolitics of oil, control of these sea lines of communication is a very important geopolitical tool. The US appreciates that. A real crucial battleground is going to be the Indian Ocean. Who is going to be the naval hegemony there? Is it going to be the US is who has been that naval hegemon for decades? Is it going to be China, which is where most of the barrels are going? Or of course, is going to be India itself, which you would argue is the natural hegemon in that region, it's got the land bases to maintain that. And that's actually really going to be a very important factor throughout the coming century, even as oil demand declines.
Sticking with the idea that the price of oil will be low in a world of peak oil demand. You could also imagine that given prices will be low, that the transition may slow down in certain parts. India may think, we still don't have enough battery metals, we don't have enough lithium ion battery factories, and so we're not going to be able to make as many electric cars. Oil is pretty cheap now, let's just keep burning gasoline for longer. How do you think about cheap oil in a world where we will still need to reach net-zero targets and actually cut oil consumption, but the incentives to cut oil consumption from a financial perspective will not quite be there?
As it happens, I would actually sort of challenge the premise a little bit of that. I think economists generally assume that in a world of declining demand for a commodity, the price of that commodity will naturally be lower. But I think actually, if you think about it a little bit more, the prices don't come. They're not a direct outcome of demand, they're an outcome of the interplay between supply and demand. And suppliers get to adjust the amount of supply they produce according to the demand they see. And I think that the classic example of this that you'll see is coal. Coal consumption, with what we've seen in China over the past year, it's actually creeping up towards its sort of historic peak, but coal consumption more or less peaked in 2015. And coal prices have not been structurally drastically low since then. In fact, coal prices in the trading market have often been extremely high. And that's for fairly simple, straightforward reasons. If you think about it, if you're a producer of a fossil fuel, and you see demand declining, then you're going to produce less. And of course, right now, if you go to any Saudi Aramco earnings presentation, you will see Saudi Aramco saying, ‘The world is not investing enough in oil.’ And in fact, you'll actually see the IEA saying the world is investing far less in oil historically than it has, particularly considering the oil price. So the suppliers of oil are producing less of it. And they're doing that because they want to keep prices high. Saudi Arabia, Russia, clearly want to keep prices high. So I think the assumption that a path to net zero is going to be guided by low prices, sort of underestimates the extent to which the suppliers of these fossil fuels can see that the writing's on the wall and actually will respond accordingly.
And that also speaks to the point that many of the Middle Eastern oil producers balance their books, their budgets, at a much higher oil price. Saudi Arabia right now wants $100 barrel because it wants to spend all this money building Neom and other projects. And so there is motivation to keep those high oil prices, even just to be able to keep doing the things that they do on a day to day basis.
Absolutely. And I think a really striking thing that you see in Saudi Arabia, and it goes to this point, is that what are they spending all these profits on? You know, oil is immensely profitable for Saudi Arabia. And it's using it to buy football teams. It's using it to build cities in the desert, it's using it to sort of cut back on some of the fiscal consolidation that they've done in recent years. What it's not doing is it's not using very much of it to produce more oil. And historically, when Saudi Aramco is getting the sort of profits it's getting right now, they will be investing a lot in future oil consumption. But if you actually break down what Saudi Aramco is spending on and its Capex, quite a lot of it is going on natural gas for local supply. A surprisingly large amount of it is actually going on energy transition projects on hydrogen and renewables. Quite a lot is going on chemicals, and refining. And if you look at the spending that it's doing at the moment, a lot of it is investing in offshore refineries, basically, as future consumption for Saudi oil. But a really rather small proportion of it is going on actually increasing supply of oil. And of course, Aramco always needs to be increasing supply of oil because its existing oil fields are always declining. And if you're not investing in increasing supply, then supply as a whole declines. If you look at the behavior of every oil producer in the world out there, even there's this big deal in the market at the moment, Exxon Mobil buying Pioneer, it's buying existing production. It’s buying a shale oil producer. What it's not doing is investing heavily in these big long term offshore new oil fields, some of which in places, like Guyana have been very successful for Exxon. But by doing M&A of another company it’s basically buying existing production, it’s not increasing production.
We're talking about peak oil demand. But in the moment that we sit, there is a spring in the step of the fossil fuel industries, especially the oil and gas industry. And we will be having COP 28 in the UAE, an oil and gas producer, and that will be headed by the president who is also a CEO of their national oil company. How do you think that's going to affect climate diplomacy at COP 28?
Clearly, you've seen a shift, as you say, there is more of a spring in the step for oil producers. There is that sense that they have the wind at their back. But again, I think if you look at actual production, OPEC+ has cut production over the last 12 months. They've introduced about, four or five million barrels a day of all production cuts over the last 12 months, and the oil price is basically exactly where it was 12 months ago, it's moved around over that period, but it's actually where it was. So I think the thing that I would sort of worry about more with the energy transition is actually not really to do with the interplay in the energy market at all. It's more to do with trade factors. I think that's the real threat to the energy transition at the moment, it's actually much more the rising levels of protectionism that we're seeing that really shaking off the market in renewables equipment. We're seeing that in the way that the US is applying more tariffs to Chinese solar equipment, the European Union is investigating Chinese electric vehicles and that sort of thing. That's actually the bigger threat because the money is actually already moving away from oil and towards renewables. If you look at investment in upstream oil, there's not enough investment going into fossil fuels to maintain the demand levels that the fossil fuel industry is arguing we're going to see.
And so if on the numbers case that you make, and you've made this in a number of columns that you've written over the years, all producers are not investing more money into new oil production. Yet on a rhetorical level, they keep saying, The world is not investing enough in more oil production. You say that in between the lines, you're reading this as their admission that actually peak oil is kind of here, it’s going to come soon. And we just are starting to prepare for the world after. But while we do that, we don't really want to tell anybody about it.
I think it's very curious. And I don't have a conspiratorial theory that they're lying to us about what they really think. But there's this concept in economics called revealed preference, where you'll say to people, do you want to eat some healthy food? Or do you want to eat some sugary delights, and people say, oh, I believe in eating healthy food. And then you put a bunch of food in front of them, and they just eat all the chocolate. And you call that revealed preference. There's the thing that you say that you want. And then there's the thing that you actually do. And I think you see an example of revealed preference in the oil market, because as I say, the last time, our prices were over $100 a barrel, capital investment in upstream oil was close to a trillion dollars a year, think sort of $800 to $900 billion a year. Right now, oil is again around $100 a barrel and capital investment is about $500 billion a year. Significantly lower. If you look at the way that they're investing, they're not able to justify the level of investments within their own fields to meet this supply. And no one is finding the level of investments that they can justify. And I think that that is an acknowledgment that really, oil demand is not going to zero, but they're sort of projections where it goes from it's sort of 100 million barrels a day to sort of 80 million barrels a day over the next decade and further down beyond that. I think that that's perfectly credible.
When you look at the numbers, and we've gone through so many of them, there's always a case, especially in the oil markets, to pick a slice of the numbers and make a case that would be completely opposite to the one you have made today. But it is fascinating that the longer term trends are starting to show up in such interesting ways. And so I'm glad you're on the peak oil beat and I look forward to your future columns. Hopefully you're not wrong. And if you're wrong, then you will tell us why you were wrong and you will make a new prediction. So thank you for all that insight.
Thank you, Akshat, thank you.
In researching my book Climate Capitalism, I kept coming back to the years 1973 and 2015. That’s because the OPEC oil embargo in 1973 kicked off a race to develop alternative energy sources, such as batteries and solar. Decades later, when the world finally agreed on a climate goal in Paris in 2015, those green technologies were ready to work at scale. Now, 50 years later from that pivotal year and eight years after the Paris Agreement, it’s clear those clean-energy technologies are finally eating into the world’s addiction to fossil fuels.
Thank you for listening to Zero. If you liked this episode, please take a moment to rate or review on Apple Podcasts and Spotify. It really helps and if you write a review, we might read it on a future episode. Share this episode with a friend or to someone who's a fan of the TV show Dallas. You can get in touch at [email protected]. Zero’s producer is Oscar Boyd and senior producer is Christine Driscoll. Our theme music is composed by Wonderly. Special thanks to Kira Bindrim. I'm Akshat Rathi, back next week.