Divestment in the oil industry is not only inspired by environmental policies, but by a perceived uncertain future for oil demand.
In the last two years, analysts have pushed forward the prospect of Peak Oil Demand (POD), a scenario scary to oil producers and investors, at least at first look.
But POD is said to mean different things to different people. Some see growth in other energy sources pressuring oil demand which may reach a level where no growth is foreseen after. Others see it occurring when oil supply potential is reached and no new supplies are coming forward.
Let us discard the second view, because we know that the resource base of oil is high enough to take us into many decades of consumption and that the potential of finding new resources is still there. When economies mature, energy efficiency improves, energy growth rates may slow down. But we are nowhere there.
And let us not forget that energy poverty is pervasive and there are 2.7 billion people without clean cooking fuel and more than one billion without electricity supply.
Falling growth rates in oil demand are theoretically possible, but there were years when growth shot up sharply. Opec in its ‘World Oil Outlook 2017’ says, “Long term global oil demand growth is forecast to decelerate steadily, falling from an annual average of around 1.3-mbd during the period 2016–20 to only 0.3mbd every year between 2035 and 2040.
“This deceleration is a result of slowing GDP growth, assumed oil price increases, a structural shift of economies towards a more service-oriented structure, efficiency improvements as a result of tightening energy efficiency policies and/or technological improvements, and oil facing strong competition from other energy sources.”
Too many assumptions... yet no POD implied to 2040 and further beyond.
The International Energy Agency (IEA) while confirming ample oil resources says: “A combination of sustained high prices and energy policies aimed at greater end-use efficiency and diversification in energy supplies might actually mean that peak oil demand occurs in the future before the resource base is anything like exhausted.”
No one would disagree, but the combination of all the said parameters does not exist so far.
The IEA does not forecast POD in both its current and new policy scenarios, where oil demand in 2040 is forecast at close to 119- and 105mbd respectively. And it will be a long time before such growth would level off or peak. In March 2017, Fatih Birol, the IEA’s executive director, said, “We don’t see a peak in oil demand any time soon.”
The US Energy Information Administration says, “World petroleum and other liquid fuels consumption grows by 18 per cent between 2015 and 2040,” such that liquid fuel demand would be 113mbd. Yet Bank of America thinks POD may come sooner as “Electric vehicles will likely start to erode this last major bastion of oil demand growth in the early 2020s and cause global oil demand to peak by 2030.”
Some even expect the POD to come earlier ignoring the fact that demand decline in developed countries is much more than compensated by growth in the rest of the world. The decline, if any, in the consumption of car fuel — due to EVs — may be compensated by growth in consumption by trucks, aviation and shipping in addition to the higher growth in petrochemical feedstock.
Spencer Dale, chief economist of BP, and Bassam Fattouh, director of the Oxford Institute for Energy Studies, say global oil demand is likely to continue growing.
“But that pace is likely to slow over time and eventually plateau, as efficiency improvements accelerate and a combination of technology advances, policy measures and changing social preferences lead to an increasing penetration of other fuels in the transportation sector.”
They also add that while the timing of the peak is highly uncertain and sensitive to assumptions, “Peaking oil demand is not expected to trigger a significant discontinuity or sharp fall in demand.”
Take for example, the IEA’s Sustainable Development scenario, which foresees tightening climate policies and extremely high penetration of EVs forcing oil demand to peak in the mid-2020s. Yet, liquid demand in 2040 is forecast at over 80mbd, and even if biofuels are excluded oil demand would be about 73mbd.
Oil producers should be prudent enough about the prospect of POD, but not to be scared by it. The world should be more concerned maintaining production capacity and increase as required.
Oil producers must beware of high oil prices and how it might accelerate POD.