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Global oil demand to disappoint

Peak requirements may be here much quicker than in some forecasts

Oil consumption is expected to continue to grow through 2040, albeit at an increasingly gradual pace, according to base case scenarios from major oil forecasting organizations such as the International Energy Agency (IEA). But there are reasons to conclude oil demand will peak sooner rather than later, and the decline may be surprisingly precipitous thereafter. 

Slower than expected economic growth because of US-China tensions; greater concern about oil security given this new superpower rivalry, as well as the vulnerability of key oil infrastructure in an unstable Mid-East Gulf; more powerful environmental movements targeting climate change, local air pollution and oil-based plastics; and the increasingly rapid rate of technological advancement could all serve to accelerate peak demand. 

The transportation and petrochemical sectors are supposed to drive global oil consumption higher through to 2040 based on the IEA’s New Policies scenario, with China and India leading the charge. But, according to a scenario produced by my Calgary-based energy consultancy Geopolitics Central, oil demand may peak by 2025 and then decline rapidly. 

New Cold War

Much debate surrounds the Trump administration’s motive for its tariff war with China. One school of thought argues that Trump is ‘simply’ attempting to level the economic playing field between China and the US, in which case it is just a matter of time before the world’s two economic heavyweights strike a trade deal. The alternative is that the administration is attempting to pre-empt the rise of a rival superpower, in which case the tariff war is a permanent new feature of the global economy. 

As time passes and the Sino-US dispute deepens with tit-for-tat tariffs, the latter explanation looks more likely. The strategy could be compared to then US President Reagan forcing the Soviet Union into an arms race it could ill afford back in the 1980s. 

The transportation and petrochemical sectors are supposed to drive global oil consumption higher

In December 2017’s “National Security Strategy of the States of America”, the Trump administration warned of a new era of “great power competition”, citing China and Russia in particular. These foreign powers are attempting to “reassert their influence regionally and globally”, and they are “contesting [America’s] geopolitical advantages and trying [in essence] to change the international order in their favor”. In October 2017, China’s President Xi Jinping said his country was in ideological battle with the US and the West. 

“China poses intellectual, technological, political, diplomatic, and military challenges to the United States… China requires a response that is not just ‘whole of government’ but ‘whole of nation’,” Nikki Haley, US ambassador to the United Nations for the first two years of the Trump administration, wrote in a July article published in US magazine Foreign Affairs. “Fortunately, there is support across the political spectrum for countering China’s new aggressive policies. We must act now, before it is too late. The stakes are high. They could be life or death.” 

With globalisation thrown into reverse, the world’s economic, and consequently oil demand, growth could be significantly slower than projected by the IEA’s New Policies scenario. Strong economic growth has helped drive global oil consumption higher since the demise of the Soviet Union in 1991, especially since China joined the World Trade Organization in 2001. Global economic growth averaged 3pc pa during the 1947-91 Cold War, 0.4 percentage points less than projected by the IEA in its base case over the long term.

Using gap analysis—the difference between economic growth and improvements in oil efficiency in recent years—Geopolitics Central calculates that this 0.4 point difference translates to a disproportionately large decrease in global oil consumption growth, slashing projected 2017-2040 growth from 11.5mn bl/d in the IEA’s New Policies Scenario to a mere 2.4mn bl/d, with freight-reliant sectors, such as trucking, shipping and aviation, especially hard hit (see fig. 1).

Supply security

Security of supply has always been a concern of major oil importing countries in the past and will likely only become more important moving forward. The superpower rivalry between the US and China may be the epicenter of a ‘New Cold War’. But regional rivalry in Asia—with Japan, Korea and India increasingly concerned about China’s rise—is also becoming more pronounced. 

At the same time, it had long been believed that it would take a regional war, revolution or an Iranian blockade of the Strait of Hormuz to take substantial volumes of Mid-East Gulf oil off the global market. The drone attacks on the Khurais oil field and, more importantly, the Abqaiq oil processing plant in Saudi Arabia changed that thinking in an instant.

 

 

 

The IEA’s New Policies scenario projects ‘Chindia’—China and India combined—to account for 71pc of global oil consumption growth through to 2040, but this appears suspect given rising oil security concerns, especially in China (see table 1). Although the Chinese navy has expanded materially in recent years, the US Navy should continue to dominate the high seas for most, if not all, of the 2017-40 period, making the Chinese economy susceptible to a so-called ‘second island’ oil import embargo in case of conflict with the West. China’s oil import dependency rate is forecast to increase by 12 percentage points to 79pc over this period, according to IEA base case numbers, due in part to a lack of domestic production and resource. 

Environmental movements

Despite an ever more prominent global environmental movement, efforts to combat climate change have been relatively inconsistent and ineffective since the signing of the Kyoto Protocol in 1997, primarily because of recalcitrant Republican administrations in the White House. The US is the world’s second largest emitter of GHG, having been overtaken by China for top spot over the past decade.

But as the scientific consensus grows and warnings of potential impacts become more dire, the youth-led Sunrise Movement has put the so-called ‘Green New Deal’—a plan to eliminate human generated GHG emissions from the US economy within 10 years—on the political map. Although likely less ambitious and more pragmatic overall, some Green New Deal policies are certain to be a central policy plank of the Democratic Party’s presidential candidate in November 2020.

 

Local air pollution has become a growing concern in many rapidly industrialising countries— advanced economies have already dealt with this issue to a large degree—with the Chinese government having identified it as a potential cause of social unrest, given numerous protests in the past. As developing economies grow, and more people join the middle-class, the demand for personal mobility in general, and automobiles in particular, increases, often accompanied by significant deterioration in air quality in major cities. This tends to be heightened by increased truck traffic to move goods and, in the case of Chindia, primarily coal-fired power generation.  

The Indian government has adopted modest, and not uniformly enforced, measures to improve its cities’ air quality in recent years. As far back as March 2017, at that year’s National People’s Congress, Chinese premier Li Keqiang announced the ‘make our skies blue again’ plan. The plan includes smog busting measures such as cutting the use of coal, slashing vehicle emissions and supporting the adoption of clean-energy vehicles.

Freight-reliant sectors, such as trucking, shipping and aviation, are especially hard hit

The petchems sector is forecast to be a major oil consumption growth factor through to 2040, accounting for almost half of the global total in the IEA’s New Policies scenario (see table 2). But the burgeoning global anti-plastic movement threatens this rapid growth projection. 

First in the crosshairs are single-use plastics, which, according to BP, represent c. 15pc of the petchems industry’s total output. A number of countries, states and municipalities have already banned the use of plastic grocery bags, including China—not exactly a paragon of environmental stewardship—as far back as 2008, while a number of organisations are beginning to ban single-use plastics on their premises.

Biodegradable, non-toxic bioplastics are currently expensive and relatively rare compared with oil-based plastics, accounting for less than 1pc of the global market.

 

 

 

Second Machine Age

Two major examples that MIT professors Erik Brynjilfsson and Andrew McAfee gave to support their ‘Second Machine Age’ thesis in their 2014 book of the same name were autonomous vehicles and artificial intelligence. Both appeared distant possibilities, if not pipe dreams, early last decade.

But, due to incredibly rapid technological progress in recent years, they are both now on the verge of full-scale commercialization—and with relatively rudimentary versions of each already on the market. 

As a result, we should expect rapid improvements in technologies that break the back of oil’s monopoly over the transportation sector, such as batteries, fuel cells and cost-effective bioplastics in the coming years, not just trend-like technological improvements as assumed by the IEA in its base case. 

Road transport revolution

The IEA foresees a road transportation evolution in New Policies Scenario, whereas the sector is ripe for revolution, given the increasing rate of technological advancement and the rise of anti-oil policies. For example, in recent years a number of national and sub-national governments have expressed a strong desire, if not more concrete plans, to ban the sale of gasoline and diesel-powered automobiles within the next two decades—including the Chinese and Indian governments. 

At the same time, there is barely a mention of hydrogen fuel-cell vehicles in the IEA’s base case, despite Wan Gang, the former Audi executive known as the ‘father’ of China’s electric vehicle revolution, calling on the Chinese government to boost their development at a conference in Boao, China in July. 

Hydrogen fuel-cell technology may continue to have significant hurdles to overcome, especially its high cost, but Wan argues it is better suited for commercial and long-haul transportation than battery powered vehicles. Wan is now China’s science and technology chief and is leading a team to develop his country’s energy vehicle plan for the 2021-2035 period. 

And China presently trails Japanese car firms such as Toyota, Nissan and Honda, and Hyundai of South Korea. These companies and their governments have already bet that hydrogen fuel-cell technology will be well-suited for automobiles where owners live in apartments in densely populated cities that lack space for electric chargers. 

Hydrogen availability could rapidly increase as the amount of intermittent wind and solar power capacity ramp ups globally. Hydrogen could act as storage for excess renewable power produced during off-peak hours, and as a more environmentally-friendly energy source, through water electrolysis. Presently c. 90pc of hydrogen is produced by steam reforming of natural gas.

The IEA is projecting oil consumption in the road transportation sector in its New Policies scenario to increase by 3.7mn bl/d over the 2107-40 period, with growth in the trucks (light commercial vehicles, medium-duty and heavy-duty) sub-sector more than covering this amount (see fig. 2). Electric vehicles make solid inroads into the automobiles (passenger cars, sport-utility vehicles, crossovers and pick-ups) and other passenger vehicles (motorbikes, tuk-tuks and buses) sub-sectors, with oil consumption flat in the former, after peaking in 2025, and declining by 300,000bl/d in the latter. 

In Geopolitics Central’s Peak Oil Demand scenario, demand in the road transportation sector declines by a significant 8.4mn bl/d between 2017 and 2040, with all three sub-sectors hit hard. Consumption in the automobiles and other passenger vehicles sub-sectors is hammered primarily by high rates of electric vehicle penetration; and the trucks sub-sector first by slower economic growth, then by an increasing number of hydrogen-powered vehicles later in the period. 

Peak Oil Demand

The trajectory of global oil consumption is fairly similar between the IEA’s base case and Geopolitics Central’s Peak Oil Demand scenario until 2025, since it takes time for divergent assumptions about economic growth, technological advancement and energy policies to really bite. Global oil consumption increases by 7.6mn bl/d to 102.4mn bl/d between 2017 and 2025 in the New Policies scenario, compared to a 5.6mn bl/d increase to reach 100.4mn bl/d in Peak Oil Demand. Thereafter, world oil demand gradually increases to 106.3mn bl/d in 2040 in the former, but slumps to 82.2mn bl/d in the latter. 

 

 

Differences in Chindia’s oil demand between the two scenarios is fairly proportional to the world as a whole, but consumption is slashed significantly more in China than India in the Peak Oil Demand projections. The authoritarian Chinese government has greater power, resources and will—due to more significant security of supply concerns—adopt policies to retard oil consumption faster than the democratic Indian government. Chinese consumption declines by 800,000bl/d over the 2017-40 period under Peak Oil Demand, compared to a 3.5mn bl/d increase in the IEA’s base case. In contrast, Indian oil demand increases in both scenarios, by 2.9mn bl/d and by 4.7mn bl/d, respectively. 

Slower economic growth depresses aviation and shipping demand over the projection period in Peak Oil Demand, as well as the adoption of hydrogen-powered technologies later in the period. In the case of industry and petchems, slower economic growth again plays a role, while oil as a feedstock for petchems is negatively impacted by consumer boycotts, higher recycling rates, government policies, and, later in the period, more cost competitive bioplastics.

It is important to note that biofuels consumption – contributing to liquids, but not crude oil, demand– is assumed to be the same under the two scenarios through to 2040, despite the Second Machine Age potentially supercharging the rate of technological advancement in a Peak Oil Demand future and further eroding appetite for hydrocarbons. 

Biofuels investment has seen a precipitous drop this decade, after roaring ahead in the 2000s, with confidence waning among investors, researchers and policy-makers alike. The negatives of crop-based first generation biofuels are now seen by many as greater than the positives, while development of cellulosic-based second generation biofuels has been moving ahead at a snail’s pace. 

Vincent Lauerman is president of Geopolitics Central. He has spent the majority of his three-decade career working as a global energy analyst, specialising in oil markets

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