Oil Demand Will Flatten, but Persist

As vaccinations roll-out globally – slowly in some places, more rapidly in others – and governments inject massive stimuli to fuel economic growth, we’re left wondering and hoping that we’re turning a corner.

“This recovery is happening more rapidly than expected,” is how a senior oil and gas executive put it recently as she and I discussed the rebound in oil prices and its impact on our industry.

Yet, the uncertainty that has dominated our world for more than a year persists, and the convulsions our industry experienced – that many of our members experienced – leave us looking for guidance, for insight to what the future holds.

Predicting the future, as the old saw reminds us, is difficult. Still, that doesn’t prevent us from trying, and last month the Paris-based International Energy Agency issued its latest five-year forecast for oil against the backdrop of global pandemic and the worst economic downturn since World War II.

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As vaccinations roll-out globally – slowly in some places, more rapidly in others – and governments inject massive stimuli to fuel economic growth, we’re left wondering and hoping that we’re turning a corner.

“This recovery is happening more rapidly than expected,” is how a senior oil and gas executive put it recently as she and I discussed the rebound in oil prices and its impact on our industry.

Yet, the uncertainty that has dominated our world for more than a year persists, and the convulsions our industry experienced – that many of our members experienced – leave us looking for guidance, for insight to what the future holds.

Predicting the future, as the old saw reminds us, is difficult. Still, that doesn’t prevent us from trying, and last month the Paris-based International Energy Agency issued its latest five-year forecast for oil against the backdrop of global pandemic and the worst economic downturn since World War II.

On the one hand, global oil demand is growing as economic activity resumes. But the pandemic-induced changes in personal behavior – including telework and reduced business and leisure travel – may have a long-term impact on demand. And many governments are signaling a desire to accelerate the transition to a low-carbon energy system and directing investment to achieve this objective.

This growing demand is not uniformly distributed. In fact, while IEA predicts strong growth this year, rebounding from a nine-year low of 91 million barrels per day in 2020, the demand curve flattens by 2023 at 104 mb/d. Much of this demand, however, will come in emerging and developing economies, rather than Organisation for Economic Co-operation and Development member countries. And 70 percent of the predicted growth in demand between 2019 and 2026 comes from the petrochemicals sector.

Is Peak Demand Upon Us?

The impact of low-carbon policies on demand may set the stage for global peak oil demand in 2026, according to the report. But that’s a tall order, requiring both tough policies and changes in behavior, which may or may not occur. Still, they point out that global demand for gasoline has likely peaked as the transportation sector electrifies, particularly in rich countries, and that OECD oil demand will likely never exceed 2019 levels. The trend is there.

The regional differences for oil demand are stark. After an initial rebound in demand this year and next as economies recover, IEA predicts North America, Europe and OECD Asia Oceania demand to flatten, while Asia/Eurasia (non-OECD), Africa/Middle East and South America continue to grow, with China and India leading the way.

U.S. is a Swing Producer No More

The story on the supply side shows another significant regional shift. The U.S. producer is swing producer no more, with the Middle East regaining its position as the source of additional supplies to global markets. The Gulf states, in particular, have the available spare production capacity to meet demand.

IEA’s forecast for U.S. production is “modest growth,” recognizing that while production costs have decreased, industry consolidation, capital constraints, a focus on generating real returns and emerging ESG (environmental, social and governance) issues are combining to rein in U.S. shale producers, particularly the independents.

As I wrote in February, a lack of investment could cause significant issues in the medium to long term. The IEA forecast echoes those concerns, explaining that while the national oil companies continue their investments in upstream projects, the international oil companies (IOCs) are allocating capital away from upstream projects, and particularly in Europe, toward investments in the energy transition.

In addition, the scale of write-offs by the majors has been staggering. According to IEA, eight IOCs “wiped a record $105 billion off their books and announced plans to lay off up to 40,000 workers.” Writing down the value of these assets and reducing expenses have put these firms in a position where the breakeven price for their remaining portfolios is the lowest it’s been in two decades. They are now positioned to benefit as oil prices increase, but it came at a significant cost.

The Bottom Line

Here are some of my takeaways from reading the IEA forecast:

  • Oil demand will grow through 2026, but not dramatically. And while China and India will see strong demand growth, as will other emerging and developing economies, it will be offset by a peaking demand in the OECD.
  • This peak in the OECD is contingent on COVID behaviors – such as telework – persisting and governments implementing policies that reduce demand, such as electrification of personal transportation. Such policies being announced in both Europe and the United States have implementation timetables that do not require immediate shifts in consumer behavior. That raises questions about whether they will eventually occur.
  • It’s unlikely that underinvestment will result in a supply crunch by 2026, but the longer investment decisions are put off, the more difficult it will be for the industry to meet future demand, leading to price increases and potential demand destruction.
  • We are a depletion industry – the oil that is produced and consumed must be replaced. Demand may be flattening, but it is not disappearing. Uses for the product might shift away from transportation fuels toward petrochemicals, but demand remains.

Put another way, our first challenge as petroleum geoscientists is supplying the world with the 104 mb/d of oil it needs to fuel modern society and lift millions from energy poverty. But we can’t stop there. We must help society – our family and friends, especially those who think “petroleum” is a dirty word – understand that this valuable resource and the industry that produces it is at the heart of the energy evolution.