It’s possible that 2017 may go down as the year when the concept of peak oil demand went from speculation to potential reality, as companies and energy analysts began estimating when demand growth for oil would begin to taper off.

The debate over whether peak demand is coming has been fierce, but it’s possible that the inordinate focus on the potential plateau in global oil demand ignores more important, immediate concerns that will have a much bigger impact on prices.

While the predictions of when peak demand may come vary quite considerably, they mostly point to levelling demand in the developing world due to slowing growth, stable or declining demand in the industrial world due to the widespread adoption of electric vehicles, and the replacement of oil by natural gas or renewable energy. New demand will come from petrochemicals, driving the need for light end products and diminishing the need for heavier crudes, according to McKinsey & Company.

Electric and self-driving vehicles will be the key disruptors. EVs, which currently account for only 0.2 percent of all cars, will make up one-third of all new car sales by 2040 according to IHS Markit, increasing their overall share to 16 percent.

The IEA revised its demand prediction downwards this week by 100,000 bpd for both 2017 and 2018, to 1.5 million bpd and 1.3 million bpd respectively. The group, which has caught some flak for its incredibly optimistic estimates of U.S. shale production, also cautioned that higher non-OPEC production next year will keep prices from rising above $60. Prices slumped a bit this week on the back of weaker demand forecasts and reports of higher inventories in the U.S.

Peak demand has become an established idea, to the point that BP’s CEO Bob Dudley was able to quote an exact date. Asked when peak oil demand would arrive, he suggested June 2, 2042.

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But is the case for peak oil overblown? Should the market be more concerned with short term factors, rather than the still distant prospect of slowing or declining demand?

OPEC doesn’t think peak demand will come before 2040, citing strong current demand and the continued economic growth in the developing world. Daniel Yergin, energy expert and vice president of IHS Markit, thinks it’s “funny to be talking about peak demand” when annual demand growth remains so strong, and when economic activity in the developed world, particularly North American and Western Europe, has recovered.

Jamie Webster of BCG’s Center for Energy Impact noted that oil demand in 2017 was particularly strong, rising 1.6 million bpd. Demand growth will likely continue to be strong for years before peaking, but Webster points to a much bigger short-term problem: the rising decline rate and the reduction in capex committed to new production.

Placing a hard figure on decline rates has been tricky, but the rule of thumb has been 3–6 percent a year. Offshore tends to decline faster than onshore, while shale declines faster than anything else.

The average decline rate has spiked in part due to the growing emphasis on shale production, where decline rates are high. According to one estimate, 2016 had the highest decline rate on record, and BCG assessed the decline rate for 2017 at 9 percent or 8.8 million bpd.

The Eagle Ford Region in Texas, according to the EIA, is adding new production, but its legacy oil production fell so far as to balance out the increase, leaving the field with zero net change between October and November.

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This is potentially a much more important consideration than peak demand. Earlier this year the IEA ran alarm bells, warning that the fall in capex on developing new production (a result of the slump in oil prices) would lead to near-term shortages as decline rates accelerated. The group’s five-year forecast saw higher prices as spare production falls to a fourteen-year low in 2022.

Companies spent $450 billion on upstream in 2016—about 25 percent less than what they need to meet demand growth and make up for the decline rate.

A potential silver lining is the fact that new shale production can come online relatively quickly, making up for the higher decline rate. But shale, despite the IEA’s abundant optimism, can’t shoulder the burden on its own. While acknowledging that shale has over-performed and proven quite resilient amidst low prices, Webster points out that its growing importance to the supply balance will increase the risk of supply shortages in the near-term, impacting prices in more immediate ways than the distant, nebulous prospect of peak demand.

By Gregory Brew for Oilprice.com

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