GALVESTON, Texas — Peak oil demand is not imminent, and hydrocarbons will be a necessary component in the energy mix for some time, according to Rice University’s Kenneth B. Medlock III, Rice University’s James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics.

Oil demand growth continues to rise as fuel demand shifts internationally, Medlock said during the IADC/SPE International Drilling Conference and Exhibition on March 5.

Annually, demand has grown at a rate of about 1 MMbbl/d since 2000, and many assets are being developed to meet that demand. 

“This is a growth story,” he said.

Demand in the Organization for Economic Co-operation and Development (OECD) countries is slightly down relative to 20 years ago — due to efficiency improvements, slower economic growth, aging populations, adoption of electric vehicles (EV) and policies, he said. At the same time, economic growth, industrialization, consumerism, demographic changes and energy shifts in non-OECD countries has grown, he said.

Kenneth Medlock
Kenneth B. Medlock III, the James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics, Rice University. (Source: Baker Institute)

As long as non-OECD demand growth is larger than OECD decline, Medlock said, a near-term peak is unlikely.

With 67% of oil production at least partially owned by nations that benefit from the money generated from that production, he said it is unlikely that countries will move to cut off the taps in the next decade.

“It is incredibly important for the budgets, the social programs of these governments. It's not disappearing. Will they look to diversify? Absolutely. Will they seek to capture new margins of growth? Absolutely. And that's exactly what you're seeing. But will they completely cut this off in the next 10 years? Absolutely not,” Medlock said.

He noted that supermajors including ExxonMobil, Chevron, Eni, TotalEnergies, Shell and BP produced about 10% of the global output in 2022, and that together they produced less than the world’s largest national oil company, Saudi Aramco

Supply and demand is governed not by politics, but by economics, he said.

“The system's going to continue to evolve without a doubt, and politics will play a role, but at the end of the day, economics will drive, ultimately, what happens,” Medlock said.

Energy transition is complex

Medlock noted rationality and economics are rarely part of the conversation around the energy transition. And what the transition looks like in more developed countries will be vastly different from less developed countries, he added. Sustainability is multifaceted and a number of factors come into play, including supply chains, infrastructure and another transition — that of materials. 

“Nobody knew what a supply chain was until 2020” when the Covid-19 pandemic disrupted supply chains globally, he said.

Beyond that, infrastructure is fundamental to everything. In fact, he said, the need for infrastructure buildout is the Achilles heel for a lot of recent U.S. legislation that has been adopted.

Moving away from hydrocarbons is complicated, he said, and many haven’t recognized that hydrocarbons are fundamental to all of the materials people use on a daily basis. 

“You have to get into a discussion about materials transitions as well, and that extends the time horizon. It brings in a lot of complexities that a lot of people, quite frankly, don't often internalize,” Medlock said. “Hydrocarbons are embedded in everything we do.”

Terry Palisch, vice president of technology and engineering for CARBO Ceramics and the 2024 SPE president, said there are realities about energy that need to be understood. 

First, the world population continues to grow, with the world expected to support 2 billion more people by 2050.

“That’s going to push energy demand,” he said.

And with 60% of the population living in “some form of energy poverty … it's either not accessible or it's not affordable or it's unreliable or it's not secure. We have a lot of work to do,” Palisch said. “We have yet to transition away from anything, including wood and biomass. So I think that we have a lot of running room in our industry.”

Terry Palisch
Terry Palisch, VP of technology and engineering for CARBO Ceramics and the 2024 SPE president. (Source: Jennifer Pallanich)

The world needs accessible and affordable energy that is reliable and secure as well as green and decarbonized, he said. 

“People call it a trilemma because I think a lot of people think you can't have all three. But I think that this is actually the opportunity for our profession and for those of us in our industry,” Palisch said.

Coal use up and down

With oil, gas and coal providing a large part of the energy mix, Medlock said, the world is still very much a hydrocarbon-powered world. And countries will use the resources most at their disposal, he said.

He said a delegation from India visiting the Baker Institute a few years ago said it would use coal to meet energy demand despite global concerns about coal combustion’s impact on the environment and climate change.

“They said, ‘You don't understand. The issue is not that we don't care about the environment because we certainly do, but we also need to feed and clothe our people. We need to provide well-paying jobs,’” he said. “The thing about coal in India — they have it, so you use what you have first.”

Medlock said the delegation recognized that developing the coal mines, developing the rail infrastructure to move the coal and developing the facilities to combust the coal would put hundreds of thousands of people to work.

On the other hand, the U.S. and Europe are busy retiring coal-fired plants that were built around 1980.

“That stuff was built with roughly a 35- to 45-year design life. Where are we right now? That stuff is up for retirement. It's aging out, and so it's a really simple process that then begins to happen. Our [power] generators have to think about, ‘well, do I upgrade and retrofit it or do I retire and replace?’” Medlock said. “Yes, it's being retired in the U.S. and in Europe, but that's a function of how old the fleet is and what the replacements are.”

And in the U.S. the shale boom made cleaner-burning natural gas abundant and inexpensive.

“The shale revolution made that a really simple decision because gas came on, and it got really cheap, and developers started to build a lot of natural gas (facilities),” he said. 

In fact, he said, the shale revolution in the U.S. is one of the two most influential drivers of change in the global ecosystem, with demand growth in Asia being the second.

The role of innovation

“Innovation and growth are really the two things that are going to shape the future,” Medlock said.

But for innovations to be adopted, they have to integrate into existing systems, he said. An innovation that trims 10% of production time that can be retrofitted into an existing facility is more likely to gain traction than an innovation that halves production time but requires an entire rebuild to achieve, he said.

“If you look at the history of the energy sector, the technologies that tend to move the needle the most are ones that can actually be integrated into legacy supply chains,” Medlock said. 

He said the more capital intensive a sector is, the less likely a disruptive technology will emerge. 

“Capital intensity is about how much you have to spend to make the supply chain bigger. As that number gets bigger, it's harder to tear it down,” he said.