Outlook Points to Peak Transport Demand for Oil

Source: BP.
Liquids demand and demand growth to 2035 are shown in BP’s 2017 Energy Outlook.

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Transportation is the linchpin of oil consumption, responsible for more than 50% of the oil that the world uses every day and almost 70% of that consumed daily in the United States. Forecasters all agree that the global vehicle fleet, the dominant factor in transportation demand for oil-based fuels and the major source of transport-sector growth, will expand greatly in the next 20 to 30 years.

Thus, it is notable that BP in its 2017 Energy Outlook forecasts, as a base case, that by the mid-2030s, transport demand growth for oil will slow to a trickle, while demand for noncombusted oil use—particularly in the petrochemicals industry—will become the chief driver of oil demand growth.

Specifically, over the outlook ­period of 2017–2035, the growth in transport demand will decelerate from 1 million B/D per year to 0.4 million B/D per year and level off, while the demand for noncombusted oil use will increase by 6 million B/D.

Not every forecast agrees with this. The International Energy Agency and ExxonMobil, for example, believe that transport demand will continue to drive oil consumption growth for substantially longer. On the other hand, Shell Chief Executive Officer Ben van Beurden recently said that oil demand as a whole could peak in the early 2030s and possibly sooner with higher biofuel use. There are forecasts from outside the industry that show oil demand peaking and starting to decline sooner rather than later.

Implications for Industry

The point is not that one forecast or the other is correct, but rather to start thinking about the implications of a transport demand for oil that no longer increases. It is bound to happen at some point, even if the more robust demand forecasts prove correct. What will the industry begin to look like when transport no longer delivers market growth?

But first, what is the case for anticipating a slowing and leveling in transport demand by approximately 2035?

“It’s largely the significant improvement in the fuel efficiency of the world’s vehicle fleet,” said Mark Finley, general manager of global energy markets and US economics at BP, who was on the team that produced the latest Energy Outlook.

Vehicle Fleet Growth

“The growth of the vehicle fleet will remain robust as many people join the middle class over the next 20 years and can afford to buy cars,” he continued. “But mainly due to policy pushing for greater fuel efficiency, we’re projecting that the average car will go from about 30 miles a gallon in fuel efficiency currently to about 50 miles a gallon 20 years from now.”

While the Trump Administration in the US is looking at weakening fuel-­efficiency standards for future new car models, Finley indicated that such a move might not affect the outlook projection very much because US new vehicle fuel efficiency has already been deteriorating for several years. It is the market rather than regulatory reasons that have brought this about, as low gasoline prices have stimulated sales of larger vehicles, he noted.

US Only One Piece of Puzzle

“There are fuel-efficiency standards in Europe and even in China that are on the books and are very aggressive,” Finley said. “So what happens in the US is only one piece of a much bigger puzzle.”

As for the projected market expansion for the use of noncombusted oil, ­primarily as petrochemical feedstocks, he said, “It’s simply the continued growth in the world economy. These are the basic building blocks of the economy, and they grow more or less in line with it. They also have few substitutes in their many applications.”

Crude oil, particularly its light fractions and condensate, would compete with natural gas sources, such as gas liquids and liquefied petroleum gases, in the chemical feedstock markets. This competition already takes place and is strongly affected by relative prices throughout global markets, Finley said.

Gas vs. Oil for Feedstocks

For example, the shale revolution has yielded an abundance of gas-based feedstocks that has spurred the considerable expansion—and even global insourcing—of chemical production in the US. However, many markets elsewhere are characterized by high natural gas prices, which in some cases are indexed to oil in long-term contracts, and oil-based feedstocks may have a competitive advantage.

Finley noted that the growing exports of US natural gas, principally through liquefaction and regasification, will help in the long run to cause gas prices globally to converge.

He stressed that there is more to the outlook than the base case that has principally drawn attention.

Base Case Uncertainty

“The approach we bring to our Energy Outlook is not to focus too much on the base case because it’s so tremendously uncertain,” he said. “We like to do a base case to force ourselves to make our choices. But we don’t want to be too confident in it. We have to place some uncertainty bands around it.”

The Energy Outlook projects continued growth in oil demand through 2035, even with slowing transport demand, with overall oil consumption potentially peaking in the mid-2040s and then starting to decline.

However, there are alternative cases that weigh differing plausible scenarios for

  • Economic growth
  • Fuel-efficiency improvement
  • The speed and shape of the mobility revolution, including the uptake of electric and alternative-fuel vehicles, autonomous vehicles, car sharing, and ride pooling
  • Climate policy

The outcome of these cases could lead to an earlier or later peak oil demand.

“Although the eventual peak in oil demand will be symbolic of a world transitioning away from oil, it would mark only the first point of decline,” the outlook said. “Oil is likely to remain a significant source of global energy consumption for many decades.”

For Further Reading

BP. BP Energy Outlook 2017. (accessed 3 August 2017).

What the Oil Industry Might Look Like

Joel Parshall, JPT Features Editor

One person who has given a lot of thought to what the oil and gas industry might look like when it can no longer count on a growing consumption from the transport sector is Iskander Diyashev, an instructor for PetroSkills and a former SPE Director who is serving as an SPE Distinguished Lecturer in 2017–18 for the second time. His current lecture topic is The Future of Oil.

Diyashev has taught petroleum, reservoir, and production engineering and advanced classes in reserves evaluation, well test design and analysis, and gas reservoir management. He previously held engineering and leadership roles at S.A. Holditch and Associates, Schlumberger, Sibneft, Geo-Alliance, and NRK-Technology. He holds a PhD degree in petroleum engineering from Texas A&M University and BS and MS degrees in molecular and chemical physics from Moscow Institute of Physics and Technology.

To Diyashev, a leveling off of transport demand should be closely linked chronologically with peak oil consumption. As demand starts to fall shortly thereafter, prices will begin a long-term downward trend. He believes it will happen relatively soon.

‘Sluggish Growth in Demand’

“We might have five or maybe 10 years more of sluggish growth in demand,” he said. “And when the consumption decreases, I think we will start seeing depressed oil prices. Not depressed like now. What we see now we will come to think of as the good old days when prices were high. Oil unfortunately is a very inelastic product in terms of demand. If you have an extra 2 million barrels on the market, the price drops by a factor of three.”

With unconventional production methods having essentially eliminated the prospect of a resource shortage, there would be little reason to expect prices to resume a major uptrend.

As the price becomes very low, transportation will become a substantially higher portion of the final delivery cost. As a result, the market could begin to fragment and become less global with customer supply lines becoming shorter, Diyashev said.

Impact of Electric Vehicles

Electric vehicles (EVs) will soon begin to penetrate the market and “start destroying demand” for oil, he said. Their presence will grow and eventually become dominant. Diyashev noted China’s commitment to EV development. “If you look at the 20 best-selling electrified vehicles in China, almost all of them are Chinese-made and -designed, except for one Tesla model,” he said.

It is plausible that the increasing urbanization of the developing world coupled with the long distances between cities, particularly in China, could spur increased air travel and the consumption of jet fuel. However, that potential could be limited.

“China is building a high-speed [magnetic-levitation] railroad network very, very quickly and efficiently across the central part of the country,” Diyashev said. “So that could likely become a more important mode of transportation between cities there than aviation.”

With the overall change in the transportation market, petrochemical demand will assume added significance for the oil industry. “It will become very important because it will be the expensive, higher-value product,” he said.

Strength in Natural Gas

The other strength for the industry will be the natural gas market, although it will see increasing competition in the power sector from renewables.

“I think there is a reasonably long-term future for natural gas; I can imagine that it’s 30, 40, or 50 years,” Diyashev said. “It’s a reasonably long future because at first you’re going to have to displace all of the coal, and coal will be displaced by solar and natural gas. The chances are there will also be displacement of nuclear power generation.”

However, continued improvement in battery technology for energy storage will drive the strong expansion of solar and wind energy in the power market.

“For gas to stay competitive as a fuel component, its cost for power generation will need to stay in a range of [USD] 0.03 per kilowatt hour,” Diyashev said. “Its price will need to remain low, maybe [USD] 3.00 or 4.00 per BTU.”

Investments under way in China and Saudi Arabia will give impetus to solar energy as a growing source of global electric power.

“Saudi Arabia is planning to build 10 gigawatts of solar power and has already secured the financing. Ten gigawatts is quite significant,” Diyashev said. “There is a lot of desert in the Middle East, a lot of places to put large-scale solar generating facilities, and the land is not so expensive.”

Outlook Points to Peak Transport Demand for Oil

Joel Parshall, JPT Features Editor

01 September 2017

Volume: 69 | Issue: 9


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