oil-demandThe tar sands may be doomed. Two of the key arguments against exploiting it are gaining traction, and both may be enough to scupper investment.

Yesterday I blogged about how the idea of a carbon-constrained world, which could fatally undermine tar sands extraction, was beginning to be debated in the mainstream press: the message being a global carbon market could seriously undermine the tar sands.

The other squeeze on the industry is coming from reduced demand and that idea that is also gaining traction. Back in August I blogged about a briefing issued by Greenpeace, Platform and Oil Change International that explored the concept of the peak demand.

As the briefing paper pointed out the expense of bringing unconventional oil to market means “that the sustained oil price needed to do so is dangerously close to a ‘break point’ price beyond which oil demand is constrained via changes in consumer behaviour and reduced economic growth.

But it is not just NGOs that are issuing a demand-side warning. Last month I blogged about how the respected oil analysts IHS Cambridge Energy Research Associates had said that oil demand in developed countries peaked in 2005.

And now according to press reports, the global energy watch-dog, the International Energy Agency will make a “substantial” downward revision to its long-term forecast for global oil demand next week.

Why this is important is that this is the second year running the IEA has slashed its view of the world’s thirst for oil.

According to the IEA “demand-management policies” are having more impact than previously expected in the developed world, which accounts for about 55% of world oil consumption.

A drop in industrial activity from the recession is also a big factor in the revision.

Philip Verleger, a veteran independent energy economist based in Colorado, told the Wall Street Journal that “The rise in global oil consumption over the next 10 years could be minimal,” says Mr. Verleger.

The slowly demand means that ther will be a “gas glut”, according to other leaked drafts of the IEA’s report. The IEA says that “global gas markets have evolved from a seller’s market, driven by tight supply and demand, to a buyer’s market as demand weakens while new supply comes on stream”.

The draft of the report states: “Projected global demand points to significant underutilisation of inter-regional pipeline and LNG capacity around the world. “This looming glut could have far-reaching effects on gas pricing.”

For companies like Shell this could spell real trouble: it is investing heavily in tar sands and LNG. Both investments could be heading for the rocks.