The turning point in global oil demand

The oil industry is well acquainted with the concept of “peak oil supply,” but many find it hard to believe that there is another side to the coin: “peak oil demand.” The notion of falling oil demand may seem confusing, especially in the context of global economic and population growth. This article examines why the concept of peak oil supply was not realized and why one should believe that the concept of peak oil demand will become a reality.

The question arises: why did peak oil supply not occur at all? Put simply, the theory was based on static assumptions. In contrast, the oil and gas industry is dynamic, influenced by changing economic conditions and continuous advances in technology and expertise.

Contrary to predictions that peak oil could have happened as early as the 1950s, the world is doing better today. World oil reserves increased from 682 billion barrels in 1980 to 1732 billion in 2022. Likewise, world oil production increased from 32 million barrels daily (MMBD) in 1965 to over 94 MMBD in 2022; Therefore, the life expectancy of oil reserves is still around 53 years!

Rapid technological innovations in 3D seismic imaging, horizontal drilling, fracking and multi-completion techniques have challenged the concept of peak oil. Oil prices have been falling since mid-2014, hitting $30 a barrel in January 2016 and now hovering around $80 a barrel. A key reason for this volatility is the shale oil and shale gas boom in the US, which was initially triggered by high oil prices, albeit with a delay of several years, and has continued to rise steadily over time. (Illustration 1). In addition, technological innovations over time have significantly reduced the breakeven cost of shale oil and unlocked vast reserves previously trapped in shale basins due to the world’s low permeability. The development of these vast shale oil and gas basins, as well as conventional discoveries in new boundary basins, have been possible thanks to technological advances such as horizontal drilling and fracking techniques. As a result, US domestic oil production increased from 6.78 million barrels daily (MMBD) in 2008 to 17.77 MMBD in 2022 (Figure 1). Consequently, the debate has shifted from when peak oil supply occurs to when peak oil demand occurs.

The story goes on

Related: Oil hits new high for 2023

Figure 1: BP Statistical Energy Review – June 2023.

Peak Oil Demand Theory

Contrary to peak oil supply theories, peak oil demand is based on the assumption of ongoing technological improvements, not only in the oil and gas sector, but also in competing energy sources such as renewable energy. In addition, there are significant structural changes in the automotive industry, which have led to an increase in oil demand in the past. Any changes in the automotive industry will inevitably impact global oil consumption, as 60% of oil is consumed in transportation. The same industry that led the oil industry in the early 1900s when Henry Ford invented the internal combustion engine is now rapidly challenging the oil sector. These changes will undoubtedly affect global oil demand.

Starting in 2010, electric vehicles (EVs) began to gain a foothold in the automotive industry. Initially, its slow adoption didn’t necessarily worry the oil industry, as it wasn’t aimed at directly challenging the oil sector. But by 2022, the global fleet of 26 million electric vehicles, despite representing just 1.76% of all cars, will signal a shift in transportation trends.

Technological advances, battery cost reductions, environmental concerns and attractive government policies have prompted traditional automakers to switch to greener transportation. At the same time, the development of charging infrastructure for electric vehicles and fuel-efficient vehicles, as well as higher oil prices, have motivated consumers to consider switching from internal combustion engine vehicles.

In August 2023, an article appeared entitled “The introduction of electric vehicles could mean problems for oil exporters” was published in OilPrice. We use the same fuel economy forecast to determine when the possible peak in oil demand will be reached. The EV forecast and potential fuel savings in an alternative scenario is shown in Figures 2 and 3. In reference cases, total EV sales are expected to grow at an average annual rate of 20%, increasing from 26.2 million in 2022 to 582 million in 2040. As a result, fuel savings are projected to be 21.42 MMBD by 2040, compared to the global Oil demand of 100 MMBD in 2022. The reference case is bounded by a low and a high case to account for the element of uncertainty. In the highest case, the number of electric vehicles is expected to grow at an annual average of 23.4% and reach 937 million in 2040. Consequently, fuel savings by 2040 are projected to be 34.46 MMBD. In the low price case, the number of EVs will increase to 254 million in 2040 at a CAGR of 14.34%, resulting in potential fuel savings of 9.36 MMBD.

Figure 2: Electric vehicle trends up to 2040 in alternative scenarios.

Figure 3: Trends in fuel economy savings (MMBD) of electric vehicles up to 2040 in alternative scenarios.

Figure 4 shows the global oil demand forecast to 2040 by the Energy Information Administration (EIA) in their International Energy Outlook dated October 6, 2021. Based on their assessment, they appear to be quite conservative on EV penetration in the automotive sector. The EIA reference forecast assumes that global liquidity demand is expected to continue growing at an average annual rate of 1%, reaching 117.2 MMBD by 2040 and 125.9 MMBD by 2050. However, I expect the EIA to revise their forecasts downwards in the coming October report 2023.

Let’s take the EIA reference forecast for fluid requirements and subtract our expected fuel savings resulting from EV adoption, as shown in Figure 4. Based on the reference case, oil demand is expected to peak in 2027, and for the high scenario, it will fall a year earlier to 2026.

Figure 4: Forecast of energy information management Table A5. Global fluid consumption by region, reference case

Based on Statista’s oil demand forecast, a reference high is expected between 2025 and 2028, while the high is expected to occur in 2025 (Figure 5).

e-Figure-5: Outlook for global demand for oil products in 2045 | extra

According to a report by the International Monetary Fund (IMF), global oil demand is expected to peak 2040 or “much earlier” 1. However, the International Energy Agency (IEA) has done so projected that global oil demand will peak in the next few years and annual growth will slow to just 0.4% by 2028. The Organization of the Petroleum Exporting Countries (OPEC) has estimated that global demand for oil products will reach this level 109.8 million barrels per day By 2045, fuels such as gasoline and diesel are expected to continue to be the most commonly consumed products 2029. Bloomberg In their current study, they predicted that oil demand would peak in 2027.

Based on our assessment and the speed of EV adoption, oil demand is likely to peak in the current decade. This is yet another timely reminder for oil-exporting countries that while oil demand will continue to play a crucial role in the global primary energy mix and global economic growth, its role will diminish over time. Major oil-exporting countries have already wisely adopted appropriate strategies to reduce their high reliance on oil revenues through timely diversification. Those who ignore this shift may find it is too late by the time they finally wake up to the changing landscape.

By Salman Ghouri and Farris Ahmad

Other top readings from Oilprice.com:

Read this article on OilPrice.com