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Oil's Resilience: Oil Demand slows but maintains dominance amidst rising electric vehicles and renewables

A post by Neil Atkinson on June 29, 2023

Recently, two important bodies have published interesting reports that, taken together, show that whether it is desirable or not, the world is going to be using a lot of oil for a long time to come. The International Energy Agency’s report Oil 2023 – Analysis and Forecast to 2028 takes a medium-term view and bravely concludes that global oil demand will peak in 2028 or very soon after. The IEA also suggests that there is sufficient investment in the upstream oil industry that ample supply will be available to meet demand. The UK-based Energy Institute published their Statistical Review of World Energy (formerly published by BP plc). This is a treasure-trove of fascinating data and one of the starkest numbers is that in 2022 fossil fuels contributed 82% of global primary energy consumption. \This shows extraordinary resilience compared to a share of 85% in 1973, the date when oil prices saw their first major spike and changed the whole oil picture. So much for the energy transition.

Looking at the IEA’s report, one of the striking conclusions is that oil demand will continue to rise through to 2028 reaching 105.7 million barrels a day compared to an expected 102.3 mb/d for this year. OECD demand will fall back and developing countries, led by China and India, will provide all the growth However, by the latter part of the forecast period the annual rate of growth will have fallen to only 0.4 mb/d versus the stellar post-covid growth of 2.5 mb/d in 2023.

A factor behind the dramatic slowdown is the rise in the number of electric vehicles on the road and the continued improvements in the efficiency of internal combustion energy vehicles.

According to the IEA this will lead to a peak in gasoline demand as early as 2025. If they are correct, in the period 2022-2028 nearly 8 mb/d of oil demand will have been avoided. This is a brave outlook, and my view is that rising costs for inputs into electric vehicle manufacturing are likely to restrain the pace of uptake by customers. Another noteworthy data point is that due to the ongoing popularity of working from home, in the period up to 2028 about 0.4 mb/d of oil demand will be lost each year as white-collar workers spend two or three days a week at home.

For shipping, the IEA expects that seaborne freight traffic will grow by an average of 3% per year from 2022 to 2028. Bunker fuel consumption will rise by 0.3 mb/d by 2028, reaching 4.5 mb/d. The rate of growth will be restrained by tightening efficiency standards imposed by the International Maritime Organisation. The IEA used fleet composition data from the United Nations Conference on Trade and Development (UNCTAD), to reach the conclusion that the average gain in fuel efficiency of global shipping could approach 10% during the period to 2028 depending on the rate of retirement of older, less-efficient vessels. Another interesting data point from the IEA report is that although marine fuel consumption will grow by 0.3 mb/d by 2028, if the IMO regulations are not fully implemented the growth could close to 0.5 mb/d.

With oil likely to remain the dominant fuel for personal vehicles, trucking, shipping, aviation and petrochemicals, the IEA’s outlook for a dramatic slowdown in the rate of growth of demand in just a few years from now is regarded by many as questionable. This brings us back to the Energy Institute’s Statistical Review of World Energy. For all the huffing and puffing about investment in clean energy, the stark reality is that the big picture for energy has changed little in fifty years. While it is possible to foresee a gradual decline in fossil fuel use in the decades to come as government policies have an impact, the reality for now is that new energy sources are an addition to the global energy picture with little in the way of actual replacement of fossil fuels. For sure, in power generation renewables are growing their share but as the Energy Institute shows, they contributed only 14.4% of global generation in 2022 and meanwhile the use of coal and natural gas in the sector both reached an all-time high.

There are of course enormous uncertainties in forecasting energy markets with little certainty where oil prices will be next week, let alone in five years’ time. The IEA deserves credit for trying to paint a picture of the oil market in 2028 and I urge anybody interested to download Oil 2023 – Analysis and Forecast to 2028 from the IEA website. It’s free!


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