Around the time when Exxon announced the acquisition of Pioneer Natural Resources, the International Energy Agency published its much-awaited World Energy Outlook.
It contained no surprises: a month earlier, its head, Fatih Birol, had said the IEA expected oil, gas, and coal demand to peak before 2030. With that, he prompted a quick and negative response from OPEC, which said the IEA had basically become part of the political establishment rather than a forecaster and an advisor.
A few days later, Chevron did what some analysts said it would do: catch up with Exxon with the planned acquisition of Hess. Talk began of more megadeals. OPEC said the deals prove oil demand is resilient. The IEA told investors not to bank on that. The future outlook for oil became a lot more uncertain. Or did it?
Following the announcement of the Chevron-Hess tie-up, Saudi Arabia's energy minister Abdulaziz bin Salman slammed the IEA indirectly by saying at a conference in Riyadh that "Exxon, Chevron didn't buy because they want to have stranded assets." The official, known for his often humorous turn of phrase with critics, also said that the deals showed oil was here to stay.
The observation was questioned soon enough in an FT op-ed by its energy editor, David Sheppard. In it, Sheppard noted that forecasts of strong oil demand were coming from a group of countries producing that same oil. Obviously, such a group would have a vested interest in maintaining a perception that oil demand is growing instead of declining, Sheppard suggested. Related: U.S. Retaliates Following Iranian-Backed Militia Attacks
The thing is, however, it's not about perceptions. Global oil demand has indeed been growing ever since the world started using oil. There have been dips and drops in the rate of growth occasionally, but the growth itself has been inexorable. More importantly, the massive investments in low-carbon energy over the past decade or so did not make a dent in that trend.
It is enough to glance at Germany to see what the effects of transition policies on oil and gas use have been. Germany is one of the most wind-ed and solar-ed countries in Europe. Earlier this year, it shut down its last remaining nuclear power plants. Soon after, it had to reopen coal power plants and a coal mine to supply them, which triggered the dismantling of a wind farm to make way.
The case has become notorious and a weapon in the arsenal of most transition critics. But it is not the only case that points towards resilient—and growing—demand for all hydrocarbons. The drivers of this demand are in the developing world: countries with increasing populations seeking to improve the standard of living for their populations and some succeeding.
China and India are the two most prominent examples of how improving standards of living leads to higher energy demand, including, notably, oil and gas demand. China has become notorious for being the single biggest investor in wind and solar power. China has been issuing permits for new coal plants at the rate of two per week over the past year. And China has become the biggest oil importer in the world with the most extensive refining capacity.
So, let's say OPEC, Exxon, and Chevron have a vested interest in making us all believe the world will need more oil in the future. But does China? Or India? Rather, they do not. What they do have a vested interest in is making life relatively better for greater portions of their massive populations. Based on data about oil consumption in both countries, this undertaking requires growing rather than declining rates of oil demand—even with wind, solar, and EVs, where, again, China is the biggest world market.
Indeed, Big Oil and OPEC have a vested interest in the world continuing to use oil and gas for as long as possible. Yet their bigger interest is in making themselves alive for as long as possible—even if that requires a move away from oil. This is what European Big Oil did: they invested billions in a pivot away from oil and gas and towards wind, solar, EV charging, and hydrogen.
Judging by the series of what amounts to U-turns among these majors following a certain underperformance of their low-carbon businesses, it did not work. And the U.S. supermajors took note. They are investing in their core business, and they are even defending it now: Chevron's Mike Wirth recently told the FT that "We are not selling a product that is evil. We're selling a product that's good."
The IEA's forecast for peak oil demand hinges on three things: massive growth in solar installations, which the IEA believes will happen over the next six years; a surge in EV sales; and continued government policies in the direction of a transition away from oil, gas, and coal. Of these, only the third is certain—for the next couple of years at most.
The other two—solar and EVs—are not doing so great. Demand for solar installations is falling at a time when it seasonally grows, we recently learned from a major inverter supplier to the European market, SolarEdge. Wind power companies are canceling projects over exorbitant costs. EV sales are rising but at rates nowhere near those necessary to eliminate any meaningful portion of oil demand.
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The only way a decline in oil demand growth can happen, it seems, is for governments to mandate lower consumption. Just like they did it in Europe with gas last year. It is doubtful they would dare go there, however.
By Irina Slav for Oilprice.com
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The most important one is that oil is here to stay. It will continue to drive the global economy throughout the 21st century and probably far beyond.
The second factor is that the raison d’etre of the global oil industry is to explore for oil and gas, develop them and produce them in sufficient quantities to satisfy global demand for them.
The third factor is that oil reserves deplete fast with production. Therefore International Oil Companies (IOCs) are always on the look for acquisitions, mergers and new oil exploration regions to boost their reserves. Without an injection of new reserves, their production starts to decline and this will affect their profitability and size thus making them vulnerable to a takeover by National Oil Companies (NOCs).
Whilst top IOCs such as Total, BP, Shell, Chevron, ENI, ConocoPhillips, ExxonMobil, Equinore and Repsol have remaining reserves estimated to last from 8.0-10.0 years, the NOCs of countries like Saudi Arabia, Iraq, UAE, Venezuela, Russia and Kuwait have access to proven reserves which could last up to 91 years at current production levels. Without new reserves, IOCs’ production will decline precipitously. For instance, oil supermajor Shell expects to have produced 75% of its current proven oil and gas reserves by 2030, and only around 3% after 2040.
As for the IEA and its Executive Director Fatih Birol, the best way is to ignore their projection of peak oil demand before 2028. They were proven absolutely wrong before and they will be proven wrong again.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert