BP currently has an excellent analysis online focused on peak oil demand. IIt’sby Spencer Dale, Group chief economist at BP and Bassam Fattouh, Director of The Oxford Institute for Energy Studies and can be found for free at https://www.bp.com/en/global/corporate/energy-economics/spencer-dale-group-chief-economist/peak-oil-demand-and-long-run-oil-prices.html.
Dale and Fattouh make what I think are four excellent points.

1. We are not going to run out of oil. In fact, its highly likely that an ever-larger amount of oil will have to stay in the ground, and never be extracted.
2. The marginal cost of production is largely irrelevant. What matters instead is the all-in cost of oil production by large state entities – and the accompanying social and public infrastructure costs. Gulf producers can technically produce oil at $10 a barrel but the real cost is probably closer to $50 once their vast social commitments are factored in
3. Demand for oil might decline amongst some customer groups but the reality is that for many countries (developing ones) and sectors (transportation), demand is unlikely to decline markedly over the next few decades. In fact, there’s a reasonable argument for suggesting that we’ll be demanding many more barrels of oil. Given this likely demand, it’s frankly a mugs game estimating whether demand for oil will peak at 75 million barrels or 110 million.
4. The competitive landscape will become ever more painful for many state producers, with the likely winners being those that produce higher volumes at a lower price. This will in turn necessitate more private sector involvement to allow for extra capital investment and operational efficiency. The US will become crucial in this mix but its unlikely to be able to produce enough oil to crash prices.

These all sound eminently sensible conclusions, and one’s I would share. But for me there is one big and important take away. Time is running out for those economies overly dependent on oil. The great game of diversification – and competitive pricing for marginal oil – is afoot and those nations with lumbering state structures dependent on subsidies from oil are facing extinction level events. We’ve already seen an early taster of this in poor old Venezuela which has had the misfortune of also discovering why socialism in one country will never work (nor will it work for that matter in any or all countries).

Whatever one’s views of the Saudi regime and its crown price MBS (mine aren’t overly positive it has to be said), they are at least grasping this essential reality.
Diversify and adapt or die. That might involve a great deal of pain now (for instance imprisoning the odd prince) but it’s absolutely worth taking those risks before the situation becomes increasingly toxic within two or three decades. As Dale and Fattouh observe the new reality is that fiscal deficits will inexorably increase.

Which brings me to my doomsday views – in large part, the fate of Europe now rests on what happens next in the Middle East. Climate change is clearly catastrophic for the Middle East (as well as much of the rest of the tropics) but the likely financial pain from a new normal in oil will only serve to intensify that agony. My own sense is that countries such as Iran and Saudi will find a way out – if they are lucky and sensible. The fate of the second tier is much more precarious. We’ve already seen what happens when states fail in the Middle East – Syria, Yemen and Libya. Do we need any more examples? I’m afraid so. We need to be honest about the next big risk. Egypt.

The great homeland of Arab culture isn’t an enormous exporter of oil but it is nevertheless a substantial producer of oil and gas. Crucially though, its government is also hugely dependent on aid from the Gulf as well as remittances from its army of expats. If, as I think will happen, the Saudis and the other Gulf States turn off the tap at some stage – not now, or even the next few years but within a few decades – Egypt will have to face up to its own structural problems: appalling political structures, bereft of any real rule of law, a rampant military industrial complex sucking the country dry, an unhappy population split between fearful Christians, worried mainstream Muslims and a solid hardcore of Islamicist fanatics. Mix in climate change, and real problems related to internal terrorism as well as endemic pollution combined with mass youth unemployment – and the likely result is toxic in my opinion.

And here’s the rub.

Egypt matters. Its military is huge and its population even bigger – at the last count 95 million strong and growing every year. I wish the government well, but I think it will fail at some point in the next few decades. And when it goes down the tide of refugees escaping what will probably be a very nasty civil war will head in one direction and one direction only. Northwards towards the European Union. If Syria nearly caused the EU to have a collective heart attack, imagine what will happen with tens of millions of people on the move? Turkey will almost certainly dodge this particular nightmare; the Russians will vanish over the horizon and European politicians will be forced to think through how they engage with the resulting mess.

The only slight complication I can see is that Algeria might get to this messy terminal end game even quicker than Egypt. And if that happens, much fun will be had in France. Suddenly all of our parochial debates about Brexit seem entirely irrelevant when one considers the great challenges ahead from climate change and the new energy economy.