Credit: Shutterstock photoGlobal oil demand will peak by 2040, according to a new report, although oil supply shortages could emerge before then.
The International Energy Agency (IEA) published its highly-anticipated World Energy Outlook 2018 on Tuesday, one of the most important energy forecasting reports published each year. In this year’s Outlook, the IEA noted that global oil demand is set to rise by 1 million barrels per day (mb/d) each year through 2025, before slowing dramatically to 0.25 mb/d thereafter.
Electric vehicles are already making inroads in the transportation sector, and that is expected to accelerate in the years ahead. By the mid-2020s, the IEA says that oil demand peaks in the market for passenger vehicles, even as vehicle sales rise by 80 percent through 2040. The agency sees 300 million EVs on the roads by 2040, which should displace about 3.3 million barrels of oil demand.
Still, demand continues to grow and doesn’t peak until 2040, which, at this point, is a pretty conservative estimate in the universe of peak demand forecasts.
The reason for this is that the IEA believes that other sectors start to take on a growing importance in driving oil demand. Everyone thinks of cars and trucks as the main source of oil demand, but over the next two decades, petrochemicals, aviation and heavy trucking account for the lion’s share of demand growth. Here are a few key figures in the IEA’s main forecast:
• Petrochemicals see 5 mb/d of demand growth, the largest of any sector.
• Heavy trucks account for 4 mb/d of demand growth through 2040, even though vehicle and logistical efficiencies avoid nearly 5.5 mb/d of additional demand growth.
• Developing economies see more than 5 mb/d of demand growth for passenger vehicles, but that is just about entirely offset by declining demand (largely due to EVs) in advanced economies.
On the supply side, the U.S. accounts for about three-quarters of the increase in global oil production through 2025, an astounding figure. But shale starts to fade in terms of importance after that date, with OPEC regaining its position as the main source of supply growth.
In fact, the IEA said that even as U.S. shale continues to grow, there is a danger in the oil market becoming overly dependent on shale. After the oil price crash in 2014, the oil industry severely cut back on spending. That has translated it into fewer discoveries and fewer new projects being developed.
Global upstream spending has started to tick up in the past year, but only slowly, and the IEA fears that at this pace, the oil market could be hit with a supply problem in the 2020s. The agency has stuck to this line of argument for a few years now, and this year’s outlook was no different.
“If these approvals do not pick up sharply from today’s levels, US tight oil production would need to grow to over 15 mb/d by 2025 to satisfy demand,” the IEA warned. But it is far from clear if U.S. shale can reach as high as 15 mb/d. In fact, the IEA’s base case has U.S. shale topping out at 9.2 mb/d in the mid-2020s. If conventional spending doesn’t increase dramatically and U.S. shale cannot take on the huge task of growing to 15 mb/d, “there is a real prospect of damaging price spikes and increased price volatility,” the agency warned.
An alternative “Sustainable Development Scenario,” which includes “determined policy interventions” by governments to curtail consumption in pursuit of climate objectives, would see oil demand peak as early as 2020 at 97 mb/d. Moreover, demand would peak in all countries by 2030. In this scenario, the number of EVs on the road would hit 930 million by 2040, more than triple the agency’s main scenario. If that occurred, it would erase around 18 mb/d of oil demand by that date.
In this sustainable scenario, both oil production and prices would have to be much lower. That would put high-cost production at risk, and only low-cost producers would survive, many of which are part of OPEC.
Overall, the IEA’s message is that oil demand will grow in the medium-term before flattening out and ultimately hitting a peak by 2040. But in the interim, the shortfall in spending by oil companies could translate into a supply shortage in the mid-2020s.
By Nick Cunningham of Oilprice.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
