Peak oil demand has been a hot topic in the past few years, just as Peak Oil from the supply side was a hot topic last decade. Energy economists wrote books exalting Peak Oil, and some of them even ended up being interviewed by the oh so hip Jon Stewart on The Daily Show. But, of course, they were dead wrong. They failed to take into account the role that technological advancement has played in economically opening new oil resource since the beginning of the Oil Age. They failed to foresee the Shale Revolution.

Are adherents of peak oil demand any more likely to be right than those on the supply side? In a nutshell, yes they are, and primarily for the same reason — technological advancement. Just as the internal combustion engine was the hands down winner of the transportation derby in the 20th century, electric vehicles appear ready to begin hammering away at oil’s transportation monopoly in the 21st century.

Land-based transportation currently accounts for almost half of global oil consumption. This share has risen significantly since the two Oil Price Shocks of the 1970s helped push petroleum products out of power generation and space heating, especially in advanced OECD countries where government policies supported the shift.

The headline of the August 12 issue of The Economist magazine read “Roadkill,” with a picture of a junked internal combustion engine beneath it suggesting a major driver for global oil demand is on its deathbed. Although The Economist has sometimes served as a contrarian indicator, with its prediction of $5 per barrel oil in its 4 March 1999 issue probably the best example, it is likely to be more right than wrong this time around. In the leader to its August 12 issue, The Economist wrote: “The shift from fuel and pistons to batteries and electric motors is unlikely to take that long.”

The Economist provided a wide range of views of how long is long. Views tied to the oil industry such as ExxonMobil and OPEC are predicting light-duty electric vehicle sales will not take off in earnest until around 2030 and will grow at a relatively modest pace through 2040. In contrast, other organizations, such as Bloomberg New Energy Finance (BNEF), are expecting electric vehicle sales to take off in the middle of next decade and soar substantially higher thereafter. BNEF is projecting total lifetime costs of electric vehicles to be lower than comparable light-duty internal combustion engine vehicles by the middle of next decade, and their sticker prices to be lower by the end.

In terms of cumulative sales, BNEF is forecasting around 525 million light-duty electric vehicles sold by 2040, more than five times what ExxonMobil is predicting. It should be noted that forecasts for electric vehicle sales have increased substantially across the board over the past few years as the industry gains traction. For the sake of comparison, there are roughly one billion light-duty vehicles currently on the road, with annual sales of around 80 million vehicles — forecast by BNEF to be 1.6 billion and 120 million, respectively, in 2040.

The primary driver for rising expectations for light-duty electric vehicle sales is the rapid improvement in lithium-ion batteries in terms of safety, energy density, and price. The price of these batteries are projected to fall at a rate between 15 per cent and 21 per cent annually — despite potentially higher costs for relatively scarce lithium and cobalt —  with electric vehicle pessimists favouring the former and optimists the latter. This is the standard range for annual price improvements for mass-produced products since the Industrial Revolution began in Great Britain in the 1760s.

But, if anything, even BNEF’s relatively optimistic forecast for light-duty electric vehicle sales could prove to be a severe  underestimation. In their 2014 book “The Second Machine Age,” MIT professors Erik Brynjolfsson and Andrew McAfee convincingly argued that we are at a second inflection point in terms of human progress that will supercharge technological advancement already propelled by the Industrial Revolution. They wrote:

Now comes the second machine age. Computers and other digital advances are doing for mental power — the ability to use our brains to understand and shape our environment — what the steam engine and its descendants did for muscle power. They're allowing us to blow past previous limitations and taking us into new territory.

Two major examples that Brynjilfsson and McAfee gave to support their thesis were autonomous vehicles and artificial intelligence. Both appeared distant possibilities, if not pipe dreams, early last decade. But due to incredibly rapid technological progress in recent years they are both now on the verge of commercialization.

As a result of the second machine age, lithium-ion batteries may blow past 21 per cent annual price reductions, or even more likely, a totally different —although not necessarily new — battery technology will win the day. Interestingly, Bill Joy, tech guru and one of the co-founders of Sun Microsystems, announced in early August that Ionic Materials, a company he is associated with, has developed an advanced, solid-state alkaline battery – like the ones you buy at the drugstore, but rechargeable. This appears to be a revolutionary step towards cheaper, safer and more efficient batteries, and it does not rely on scarce minerals.

To date, the widespread assumption has been that electric vehicles over the next few decades would only make inroads into the light-duty market, which accounts for about a quarter of global oil consumption, not the short and long haul heavy-duty vehicle market. But if batteries are substantially cheaper, safer and more efficient sooner than generally expected, electric propulsion also could make significant inroads into the heavy-duty market, which accounts for almost a fifth of global consumption.

To conclude, it’s only a matter of time before global oil consumption peaks, and the decline thereafter likely will be fairly steep with almost half of its market under threat from electric propulsion. The exact timing and level of the peak are far less certain though, with the rate of technological advancement a question mark, along with two other important factors for global oil consumption — the rate of economic growth and government policies.

Government policies have the potential to play an important role for improvements in energy efficiency and fuel switching away from oil, in transportation as well as other sectors such as power generation and space heating. In addition, a lack of oil demand growth, and then simply a lack of demand, will put continued downward pressure on oil prices which could support oil consumption if it is not at least balanced with higher petroleum product taxes. The only major sector that appears to be ensured significant oil consumption growth for the foreseeable future is petrochemicals.