With so many investors and pundits obsessed with peak oil, they may be missing the real story for oil: that we have passed peak demand and it's only downhill from here. One of the central tenets supporting the bull market in energy has been the concept of peak oil. Asserting that the world cannot produce much more oil than it currently is, the concept of peak oil predicts a super spike in oil prices. With this view in mind, the less discussed trend going on for oil may instead be peak demand. (Read more in our related article, Peak Oil: What To Do When The Wells Run Dry.)
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Demand Going Down
Rex Tillerson, the CEO of Exxon Mobil (NYSE:XOM) said at the company's annual meeting on Wednesday that U.S. gasoline consumption had peaked and would slowly decline due to the increased fuel economy of cars and the introduction of biofuels. Since transportation fuel is the main use of oil in the U.S, this does not help demand long-term. He also threw cold water on those oil bulls that have been encouraged by the recent run in oil prices into the low $60 price range. Tillerson said that optimism on the part of oil traders is just a "bet" and that "it's too early to call this economy".
New Standards for Automakers
President Obama may have accelerated this trend when he announced revised fuel economy standards last week. The new standards would require an average of 35.5 miles per gallon by 2016 for the domestic automakers. Since the U.S. will soon be the majority owner of General Motors (NYSE:GM) due to its bailout, the government will certainly have the leverage to get the company to reach these standards even earlier.
Although the government does not exert any direct control over Ford Motor (NYSE:F), the company might feel compelled to accelerate its own efforts for competitive reasons. Foreign automakers that have domestic auto operations would also have to be in compliance, so Toyota (NYSE:TM) and Honda (NYSE:HMC) might also feel pressure.
The U.S. is not the only problem for demand. Although oil bulls pin their hopes on the emerging economies and China in particular, this demand may not come through as strong as they think. The Chinese government is drafting new fuel economy standards that are even higher than the U.S. The government is looking for an additional 18% increase by 2015, to the equivalent of 42.2 miles per gallon. Biofuels are also taking a higher share of all transportation fuels, led by a 2007 law that mandated major increases in its use. (To learn more, read The Biofuels Debate Heats Up.)
The Bottom Line
Many investors are still convinced that peak oil is still imminent, despite the large drop in oil prices from the peak last summer. It might be better to start wondering whether peak oil matters at all. (For more, see Peak Oil: Problems And Possibilities.)