The true foresight on which competitive advantages are built does not result from extrapolations of past experience. It results from early identification of the trends that will be driving a market, which often means understanding what consumers will like before they know it themselves, coupled with understanding how these trends will be affecting the market, before they actually have. Forecasting oil demand on this basis leads to interesting – and for some shocking – insights.
Current Oil Demand
Since global oil demand results from a number of different segments of the global economy, each of which is impacted by different trends, current oil demand first needs to broken down to its main components before a trend-based forecast can be developed.
According to data from the international energy agency (IEA), at present the largest driver for oil demand is transportation, being responsible for approximately 56 percent of total oil demand, some 52 million barrels per day (mb/d) in 2015. Second is industrial demand from industries such as iron, steel, cement production, construction and mining, who together make up 15 percent of global oil demand, or 14 mb/d. Petrochemicals are third, being responsible for 12 percent of global oil demand, or 11 mb/d, while power generation is fourth with 6 percent, or 6 mb/d. The remaining 11 percent of global demand, or 10 mb/d, comes from a range of different industries such as agriculture, bitumen and lubricants.
Transportation, the largest driver for oil demand, is by no means a homogenous group, however, since it consists of the components passenger vehicles (25 mb/d), commercial vehicles (17 mb/d), aviation (6 mb/d) and marine (5 mb/d). Some of the components of transportation are larger drivers for oil demand than the non-transportation drivers. A trend-based forecast of global oil demand therefore requires a breakdown of current oil demand like that of graph 1.
(Click to enlarge)
Graph 1: A segmental breakdown of current oil demand
Passenger Vehicle Trends
While the total number of passenger driven light vehicles (PDLVs) on the road will most likely continue to increase, in particular in places such as China and India, the extent to which this will drive an increase in crude oil demand is debatable.
Under pressure from tightening emissions regulations, passenger vehicle fuel economy has improved substantially over recent years. In the United States, for example, the sales weighted average for fuel economy has increased from 20.8 mpg in 2008 to 25.1 mpg in 2017 – a 25 percent increase despite a trend toward larger vehicles (SUVs) amongst consumers. And there is no reason to assume that sometime in the near future this trend will suddenly end. Related: Goldman Sachs Warns Of Global Oil Demand Peak
What is very likely, however, is a gradual increase in the share of electric vehicles (EVs) in the global passenger vehicle pool, as fundamentally, EVs can meet the transportation need of consumers in a manner that is superior to what conventional internal combustion vehicles (ICEVs) offer – more seating and storage space for an equal size, faster yet smoother acceleration and deceleration, less maintenance, greater reliability, and lower environmental and noise pollution, amongst other things. Recent additions to the range of EV models available have essentially already kicked off this electrification revolution. These cars, such as Chevrolet’s Bolt and the Tesla models, offer a driving range that well exceeds the needs of a typical daily commute, and that is essentially on par with the range offered by ICEVs. Driven by improvements in battery technology, the lifetime ownership cost of these EVs is also inching closer to that of ICEVs. Already, the EV’s cost of operation (fuel) and maintenance is well below that of ICEVs. By the middle of the 2020s, battery technology is expected to have improved to the point where EVs are cheaper to produce than ICEVs, at which point EVs will outperform ICEVs on a cost-basis comprehensively and become the preferred passenger vehicle option (“no brainer”) in most parts of the world. (Interestingly, the two countries that are expected to drive growth in the global vehicle pool, China and India, are also the ones pursuing electrification of their vehicle fleet most aggressively.)
This would mean that the stock of ICEVs should be expected to stop growing as of the middle of the 2020s and enter a period of gradual decline thereafter. (Since the typical lifetime of an ICEV is 10 – 15 years in developed economies, and 15 – 20 years in the developing world, it is not unreasonable to expect, as some have argued, that by 2040 all miles driven will be electric and oil demand from passenger vehicles will have decreased to essentially zero.)
Commercial Vehicle Trends
For a trend-based forecast, Commercial Vehicles should be further subdivided in three sub-components, being light commercial vehicles (LCVs) that are designed to transport goods over shorter distances, heavy commercial vehicles (HCVs) that are designed to transport goods over longer distances, and busses that transport people.
As a group, Commercial Vehicles have been a major factor in global oil demand growth over recent years, adding nearly 6 mb/d to global growth since 2000. For some of its segments electrification is by now a clear trend, however, raising doubts as to how much exactly Commercial Vehicles will drive oil demand growth in the future.
For example, the electrification of busses is already taking place. This is because the task busses perform can be electrified relatively easily, while the benefits of doing so are substantial. Most busses drive short, inner city routes, covering distances that current battery technology can already manage. Because the utilization rate of busses is much higher than that of PDLVs, and their driving is characterized by continuous stop-and-go, the potential benefits of electrification are actually greater than in the case of PDLVs. For this reason countries and cities around the world have enacted plans to electrify their bus fleet, in order to promote bus usage (by providing bus users a much smoother stop-and-go experience), capture monetary savings on maintenance and fuel, cut inner city emissions and reduce noise pollution. The electrification of busses should therefore be expected to pick up pace during the 2020s. (Some expect that by 2030 the bus sub-component of Commercial Vehicles will be electrified to a large extent already.) This means that oil demand growth associated with busses should be expected to diminish from the second half of the 2020s onward, and might even turn negative from 2030 onward.
For LCVs electrification offers similar benefits as for busses, but the challenge of practically making it happen is greater as since the use of LCVs is more diverse. Consequently, for certain uses electrification makes more sense – and is as a result more advanced – than for others, but in general it is well behind the electrification of PDLVs and even that of busses. LCV linked oil demand should therefore be expected to continue to grow in line with economic growth well into the 2020s, and possibly even beyond that. The risk to this demand growth is regulation, however, as many cities today are considering putting in place limits on truck traffic – some have already put policies in place that will ban diesels from their inner cities by 2025. This regulatory trend can drive investment and innovation in electrified LCVs, which could speed up overall electrification of the segment by lowering the cost at which the benefits of electrification can be achieved.
HCVs least lend themselves to electrification as they tend to be used for heavy duty, long haul trucking. Some companies are currently looking at ways through which this task could be electrified, but for the segment as a whole this still seems a long way out. However, the Paris Accord will have implications for emissions standards in the countries that have signed up to it, and the HCV segment of Commercial Vehicles in particular will be challenged by this as it is one of the largest contributors to overall emissions. At a minimum, this will drive a focus on fuel efficiency in the segment, which would have as a consequence that going forward, oil demand from HCVs will continue to grow in line with economic growth but at an overall lower pace than what has been experienced in the past 15 years. Another yet less likely possibility is that the segment shifts from diesel to alternate fuels such as compressed natural gas (CNG) and liquid natural gas (LNG), which some companies at least are already betting on will happen.
Aviation is a bright spot when it comes to future oil demand, as the segment is expected to double over the next two decades. At a substantial 2.5 percent annually, growth in Europe is forecasted to be the slowest of all the world’s regions. The Asia Pacific region will add the most new flyers, with China expected to add 817 million passengers a year by 2035, India 322 million, Indonesia 135 million and Vietnam 112 million. The United States is expected to add 484 million passengers a year by 2035.
Electrification of aviation is not expected before at least another 20 years, which means that the growth in aviation will be a strong driver for oil demand growth.
Oil demand related to marine has over the past 75 years benefitted greatly from the globalization trend. Since the 1950s the growth rate of international trade has almost consistently been twice that of economic activity as a whole. From 2000 to 2008 world trade increased by an average 5.4 percent each year, while economic activity increased by only 3 percent. Marine transport has consequently seen massive growth.
Since 2015, however, the IMF has been warning that the prospect for global growth is, at best, “mediocre”, which would seriously undermine Marine’s ability to continue to drive oil demand upwards.
A further risk for Marine’s ability to continue to drive oil demand is the populism trend in politics. This has the potential of forcing globalization into reverse (which according to some has already happened), namely, through economic policies that switch focus towards regionalization or even localization of manufacturing (“America First”).
Most important for Marine’s ability to continue to drive oil demand is the International Marine Organization’s (IMO) recent tightening of the sulphur limit for marine bunker fuel. This requirement could be met through adjustments to the refining process used for the production of bunker fuel (hydrotreating, requiring investment from the refiners), or installation of “scrubbers” on board vessels to remove sulphur from the exhaust fumes (requiring investments from the ship owners). A third option is to switch Marine from oil based bunker fuels to LNG. Some of the biggest players in the LNG industry are pushing for this switch, through investments in LNG-fueling stations in ports around the world, hoping it will enable them to remove some of the supply glut LNG is currently facing. In the short term a majority of the existing vessel fleet will most likely opt for the purchasing of ultra-low sulphur bunker fuel or the installation of scrubbers in order to meet the new marine fuel bunker regulations. Vessels currently under design could more easily opt for the LNG options, however, which means that medium to longer term LNG powered vessels should be expected to become more common.
The most optimistic outlook for Marine associated oil demand is therefore continued growth, but at a substantially lower level than during the past 15 years due to lower global economic growth and the beginnings of fuel substitution.
Other Industry Trend
The Paris Climate Accord also poses a substantial challenge for energy intensive industries such as steel, aluminum, cement and paper. In order to deliver on the targets defined in the Paris Accord these industries will have to switch from “higher carbon fuels” such as coal and oil to natural gas, while at the same time implementing new technologies that substantially improve energy efficiency, as processes that are truly “zero carbon”, such as those based on hydrogen or renewable electricity, are not yet realistic alternatives.
This will be no small feat to achieve, however, as in many cases these changes require significant – and thus expensive – retrofits to existing plants. Also holding back these investments is what could be called “first mover disadvantage”, i.e. the first to implement the necessary changes will also be the first one to incur the costs, resulting in a disadvantage in the international market place.
For practical reasons oil demand from industries such as steel, aluminum, cement and paper should therefore be expected to continue to grow in line with overall economic growth.
Over the past 50 years plastics usage has increased twenty-fold, closely linked to economic growth. If this trend were to continue, plastics usage would double again in the next 20 years, driving up demand for both natural gas and refined oil products (Naphtha, LPG).
Behind these growth numbers is a global habit of use-and-dump when it comes to plastics. It is estimated that 8,300 million metric tons (Mt) have been produced over the years. 6,300 Mt of these are no longer in use, of which just 9 percent has been recycled. This use-and-dump has become an issue on a global scale. The realization that if left unaddressed, by 2050 the world’s oceans would contain more dumped plastics than fish, has lead to a number of trends that will affect plastics demand growth.
One of these trends is the substitution effect. Consumers are looking for sustainable alternatives over hydrocarbon based plastics, and governments are beginning to discourage or even prohibit the use of plastics in cases where plastics use can easily substituted (such as for example in the case of shopping bags in China and The Netherlands). Clearly, this trend will negatively affect impact plastics demand growth.
Another trend with regard to plastics is sustainable manufacturing. In response to the substitution trend amongst consumers, producers are looking at more sustainable ways to produce plastics. The so-called bioplastics niche of the petrochemical industry, in which plastics are produced from renewable feedstocks instead of crude oil derivatives or natural gas, has been one of its fastest growing sectors and is projected to maintain this pace.
For plastics the general concern about sustainability will probably also mean continued growth in recycling, which in and off itself would not impact plastics demand but would impact the oil demand resulting from demand.
All this has lead some analysts to conclude that plastics associated oil demand might have already peaked, i.e. that the petrochemical industry will not be driving further oil demand growth. A more conservative view is that plastics associated oil demand will continue to grow for the foreseeable future, but at a slower pace than heretofore.
Power Generation Trends
Oil or oil derivatives based electricity generation is amongst the most costly ways to produce electricity. For this reason the share of electricity produced from oil sources has decreased steadily since at least 1960. Today oil or oil derivatives based electricity generation makes up just 4 percent of global electricity generation. Related: Falling Chinese Demand May Be OPEC’s Biggest Dilemma
Technological progress has made wind and solar energy a viable option for ever more regions of the world. In many parts of the world wind and solar can now cost-compete with coal and natural gas, traditionally the lowest cost feedstocks for power generation, as a consequence of which many of the countries that have a dependency on oil or oil derivatives for power generation are moving forward with plans to remove this dependency.
Power generation will therefore not be driving oil demand. Rather, it should be expected to reduce oil demand.
It is hard to deny that the electrification of transport, consumer environmental concern and the implications of the Paris Accord are severe challenges for the oil industry. Nevertheless, many have argued that oil demand will continue to grow. A segmental, trend-based-analysis of future oil demand shows this expectation is highly doubtful since essentially all segments are experiencing trends that will adversely affect their oil demand. For some these trends are more acute (transportation related demand) than for other (industry related demand), but they are there for all.
This means, firstly, that it is most likely that oil demand growth will soon break with the past and start a new trajectory, where it first slows down (2020s), then disappears (2030s), and ultimately shoots into fast reverse (2040s). And secondly, that there will be substantial shifts in the product-composition of oil demand (diesel versus gasoline versus jet fuel, et cetera).
Of course, if global growth were to break with its recent past and suddenly pick up again, and implementation of the Paris Accord is delayed, and the consumer concern about the environment and enthusiasm for electric vehicles were to fade away, oil demand could continue its past growth path for another two decades. But how realistic are these assumptions?
By Andreas de Vries and Salman Ghouri for Oilprice.com
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