Peak Oil Demand: Not Yet

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Peak oil demand has not arrived, nor is it on the immediate horizon. While the pandemic prompted some to posit that 2019 may have marked the peak for global oil demand, that isn't the case. Oil demand is already running ahead of pre-pandemic levels this summer with expectations of continuing growth. Experts, including Energy Intelligence, generally now see demand rising until the late 2020s. Covid-19 has highlighted the need to address climate change and catalyzed the energy transition, but the transformation of the global energy system will take time, and the end of the fossil fuel era is not as close as some were predicting a year ago.

At the depth of the pandemic in 2020, with lockdowns in place around the world, oil demand was down 20% to 80 million barrels per day. Unprecedented economic stimulus programs included efforts to "build back better" with a focus on tackling climate change and hastening the low-carbon energy transition. Leading economies like China, Europe and the US either introduced or stepped up net-zero carbon emissions targets. But economic recovery this year has changed that picture completely. Oil demand -- and emissions -- have surged in 2021 in response to Covid-19 vaccines that unleashed pent-up demand. Global demand is at 101 million b/d this summer -- surpassing pre-pandemic levels -- and its trajectory points upward for most of this decade.   

In the short term, oil demand will be driven by economic growth and the world’s ability to control the pandemic. Pandemic-induced changes to consumer patterns, including less commuting and business travel and a higher environmental awareness, will factor. But old habits run deep and die hard, and alternatives to oil consumption remain limited. 

Energy Intelligence balances show that global oil demand will grow by about 3.8 million b/d by 2025 to 103.7 million b/d, from an average of 97.9 million b/d in 2021. Oil demand in transportation and power generation will continue to grow, especially in non-OECD countries where urbanization and a rising middle class are increasing car sales. Pending viable alternatives, oil remains key to commercial transportation (trucking, shipping, air freight) and as a feedstock for petrochemical products, where demand is also rising. Higher fuel efficiency is the low-hanging fruit that could partly offset rising demand. Exxon Mobil argues that if efficiency gains dovetail with a larger penetration of low-carbon energy, they could yield a 45% improvement in the carbon intensity of global GDP. While efficiency measures help, an immediate demand impact is coming from the growing penetration of electric vehicles.

Decarbonization is a medium-term event that will be driven by government mandates, corporate strategies, and technology. Government mandates capture public demands for addressing climate change and setting targets at national and international levels. At the industry level, oil companies are rethinking how to survive in a decarbonized world, a strategic reset prompted by investor pressure. But all of this change takes time.

Stronger government climate policies, such as those recently proposed in the EU, can potentially lower oil demand significantly, but finding the right mix of incentives and deterrence is a perilous exercise for governments, and there is a potential for backlash. Solar and wind are making more inroads but need large-scale storage options for full penetration, while hydrogen and carbon capture and storage need scale economies to bring costs down. 

The world's population is expected to grow from 7.72 billion to 8.03 billion between now and 2025, while global GDP is projected to expand by 32% over that period, according to the International Monetary Fund (IMF). Meeting these growing needs will require higher oil demand. The implementation of new low-carbon policies will be uneven geographically. Advanced OECD economies will be first, while emerging markets will trail, dragging on the energy transition. A key area to watch is how willing richer countries are to transfer capital and technologies so developing nations can achieve a cleaner expansion. The US, Europe and China account for 61% of the world’s $90 trillion economy. Add Japan, South Korea and Australia, and that percentage is 70%. Over time, they could pull along developing economies on the path to decarbonization, but this will require political and economic will.

In the short term, the IMF sees global GDP growth of 6% this year, but it is disproportionately weighed toward developed nations. Uncertainties about the future path and impact of the pandemic cloud the near-term picture. The pace of growth will depend on the speed of vaccinations, which is lagging in poorer countries.

Julien Mathonniere is a London-based oil market correspondent at Energy Intelligence. John van Schaik is editor of Oil Market Intelligence.

Oil Demand, Electric Vehicles, Crude Oil
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