The market's obsession with plummeting oil demand has been so pervasive in the past six months it even fostered a new theory -- peak demand.

Much like the peak oil movement gained momentum when oil prices were rising, now that they have collapsed some are convinced oil demand hit its highest point last year in many developed countries and will never return. They're also pumped by the commitment of many governments to support conservation and new alternative energy.

"There is a reasonable likelihood that OECD oil demand has peaked," Peter Davies, former chief economist at BP PLC, told Reuters this week. Antoine Halff and Veronique Lashinski, energy analysts at the U.S. brokerage, Newedge, said: "More and more analysts are sold on the idea that U.S. oil demand peaked in 2007. The market meltdown is likely to entrench current demand losses not only in the U.S. itself but in the world at large."

That, of course, would be bad news for a growing oil producer such as Canada.

Yet the same market focus on shrinking oil demand to the exclusion of everything else is beginning to encourage another, just as powerful view: that oil supply is disappearing faster than demand is falling.

Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said global oil supply could decline by as much as 20 million barrels a day over the next three years if the oil industry stops investing new capital, whether by building new projects or sustaining existing ones, because oil prices are too low. This would dwarf a decline in demand of about 2.25 million barrels a day over the same period.

"The market is fixated on the demand side and ignoring the supply side, and if oil prices remain at these levels, what we will see is supply destruction that is much greater than the demand destruction than we have seen," he said after addressing the Calgary CFA Society 2009 forecast dinner on Thursday.

It's the reason Mr. Ollenberger doesn't see oil prices staying at today's levels for long.

"In the 1980s and through the 1990s, we had lower prices for protracted periods because we had excess supply over that entire period. We don't have that today," he said. "I think the turnaround here will be much, much quicker. Maybe not a turnaround in 2009, but by the end of 2009 we will see pretty clear evidence of the supply destruction."

Another forecaster who's getting nervous about the world's oil supply picture is CIBC World Markets chief economist Jeff Rubin. In a report to clients on Friday,he predicted another oil spike to US$100 a barrel toward the end of this year and into 2010.

Mr. Rubin argues the recession may temporarily cut one or two million barrels a day from world oil demand, but will do nothing to stop the loss of nearly four million barrels per day this year from depletion alone.

"No one is going to finance those money-losing mega-investments at oil prices anywhere near US$40 a barrel," he said.

Mr. Rubin estimates that oil sands projects cancellations so far add up to the loss of one million barrels a day that was expected to come in the next five to 10 years. Around the world, he estimates 40 to 50 new projects are vulnerable at today's prices.

Mr. Rubin expects a world oil demand recovery to 86.7 million b/d in 2010, mostly in the developing world, but oil supply at 84.8 million b/d, resulting in a gap of 1.9 million b/d.

"Soaring oil prices will ultimately change that supply outlook by reversing some of the cancellations that have recently been announced," he said.

That, of course, would be good news for Canada's oil sands.

We could always be surprised by an explosion of new, green energy to replace oil and keep supply and demand balanced at lower prices. Realistically, it's unlikely the hype and hope will be matched by output anytime soon.