A look into the future: beyond “peak oil”?

The prevailing sentiment across the energy industry today, that we are finally approaching ‘peak oil’ and that the journey to Net Zero is inevitable, may put readers in mind of previous energy transitions. After all, we have been living through a dramatic energy transition in recent decades, away from coal to cleaner energy, led by natural gas, particularly in North America, the United Kingdom and Europe.

But it may be worth looking further back in history to glean some insights on the likely behaviour of commodity markets during such a transition. Before gas began to displace coal, coal displaced wood for heating and cooking, potentially saving many forests from complete destruction and driving the industrial revolution in these regions.

The birth of the oil industry in the 1850s began a perhaps less-well-known transition – and may have even saved the whales. Whale oil was a dominant lighting fuel in the 19th century, but what happened to pricing as the industry was disrupted, firstly by kerosene and ultimately by electric lighting? In recent research, Thunder Said Energy Research noted that whale oil pricing maintained a 25x premium to rock oil and outperformed other commodities, even as the whale oil market collapsed. As whaling declined, the prices of other byproducts, including whale bone, also rallied very sharply as supply declined.

The parallel to today’s oil market, the impact on its participants and on activity across all sectors, is worth some consideration, because this time it is the oil industry that is being disrupted.

In 2022 the energy sector rallied, as other industries suffered from the impact of the post COVID-19 hangover, supply chain disruptions, higher interests and global recessions. Energy companies received a significant boost as the conflict in Ukraine revealed the fragility of the global oil and gas supply situation.

Following the oil price crash in 2015 and eight years of underinvestment, it seems that the supply overhang that has weighed so heavily on markets has gone. In the intervening time, major oil companies have refocused their efforts, away from maintaining declining oilfields and growing new production, and towards energy transition initiatives. The events of 2022 have reminded investors and operators that their core oil and gas business is still the engine of medium-term profitability.

And while demand for their core products is not yet in full retreat, until recently all the indications were that peak oil was on its way. But will a supply-side decline be accompanied by an extended period of high and volatile prices? If so, will oil companies be positioned to benefit? Perhaps the energy transition can ‘save the whale’ after all.

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