By Ed Rawle, Chief Economist, Wood Mackenzie
The market used to worry about peak oil supply. The focus has shifted to peak oil demand as the industry witnesses a structural decline in demand from the developed world, and questions the appetite of the emerging world to grow at the insatiable rates experienced over the past 15 years.
Oil demand has already peaked across much of the developed world, starting with Japan in 2000. This contrasts with the emerging world where oil demand continues to grow rapidly. OECD demand is forecast to revert to structural decline from 2020, wiping out demand of more than 3 million barrels per day by 2035. While low oil prices have supported a resurgence in OECD demand since 2014, this price effect is already fading and we expect it to reverse as oil prices rise into the 2020s. Notably, the OECD is weighed down by a combination of government policy and auto technology which will continue to push vehicle fuel efficiency improvements and drive fuel substitution. Together with slow or no growth in the working age population, and a mature transport sector, we see OECD transport oil demand fall significantly through the 2020s.
In contrast, non-OECD demand will continue to grow to 2035, driven by rising income levels and a growing middle class that boost the desire for mobility and the use of transport fuels. Demand for consumer goods and the need to move freight in an increasingly consumer-driven world will drive oil demand higher. However, government policy, auto technology, and demographics in some countries also play a role in non-OECD demand. These factors may not lead to a drop in non-OECD demand, but they do curb the pace of growth which is expected to decelerate through time. As in the OECD, this deceleration is mainly felt in the transport sector. Non-OECD demand is expected to grow by nearly 16 million barrels a day by 2035.
Almost 60 million barrels of the 96 million barrels of oil consumed every day are used in the transport sector. As technology advances – both in terms of the fuel efficiency of internal combustion engines, and the move to hybrid and electric technology – the transport sector will have the most impact on oil demand.
Global growth in demand for oil in transport stalls by 2030, with gasoline demand hit the hardest. On a global basis, gasoline demand peaks by 2030. It’s a double whammy for gasoline: in the next decade, demand is hit by gains in vehicle fuel efficiency. Post-2025, it’s an EV story, as the ramp-up in electric vehicle penetration displaces significant volumes of gasoline demand. The impact of peak gasoline on overall oil demand into transport is tempered by increasing demand for road freight and air travel.
The petrochemical sector is one of the few bright spots for oil demand. Petrochemical feedstocks make up just over 10% of total oil demand but we see significant growth over the next 20 years. Feedstocks are forecast to add 6 million b/d to total demand by 2035 – growing 50% from today’s 12 million b/d.
Demand from all other sectors account for the remaining 30% of total oil demand. Although oil demand grows to 2035 on aggregate, it is minimal compared with what we have seen over the past 20 years. The prospect of peak oil demand is very real.
From an investment perspective, the possibility of peak oil demand could reduce upstream interest and investment in exploration. We have already seen a move away from high-cost, high-risk frontier plays where upfront costs are high. A focus on better understood basins and near-field opportunities could persist as we continue to transition to a smaller, more efficient exploration industry. Investment in high-cost enhanced oil recovery projects could also be at risk.
There are also supply-side implications from the rise of petrochemical demand versus the stall in transport demand. Liquids from natural gas production will become a key and growing feedstock for petrochemicals. Unlike oil, growth in gas supply remains relatively robust through 2035 and is a growing focus for upstream investment.
Turning to OPEC, neither revenues nor market share are likely to be significantly affected by slowing demand growth to 2035. This is because non-OPEC production plateaus late next decade and then declines to 2035. As a result, OPEC needs to increase its productive capacity to meet demand. Those OPEC producers with rising production can expect higher oil revenues next decade as their market share rises while the supply and demand balance tightens and prices increase.
However, OPEC producers cannot ignore the prospect of peak oil demand. They need to prepare for a future with less dependence on oil demand. As an organisation, OPEC does not currently have an explicit strategy to reduce its reliance on oil. But some OPEC nations have made this part of their domestic strategy such as Saudi Arabia through its ‘Vision 2030’ which seeks to develop non-oil focused sectors of the economy such as health care, tourism, and defence.
Our demand outlook poses a number of challenges to the refining sector. As demand for jet/kerosene and diesel/gasoil grows against a backdrop of declining gasoline demand, the refining sector reverts to being distillate-led. This transition is further supported by the forthcoming marine fuel regulation which mandates that the international shipping community use fuels with 0.5% sulphur or equivalent as of 2020 – down from today’s mandate of 3.5%.
The forecast decline in gasoline demand provides an opportunity for the naphtha currently converted into gasoline components, to be used as petrochemical feedstock. However, the petrochemical sector typically targets the lowest cost feedstocks, which can be ethane, or NGLs. So we do not expect the petrochemical sector to be the saviour of the oil market and drive prices higher.