Global demand for oil may well peak before 2020, falling back to levels significantly below 2010 demand by 2035, according to a multi-client research study conducted by Ricardo Strategic Consulting launched in June 2011 in association with Kevin J. Lindemer LLC.
The study, which involved the participation of some of the world’s leading energy and technology companies and organizations,found significant changes in future demand patterns strongly influenced by global energy security policies, the technology change that they promote, and demographics.
The study predicted that evolutionary change in automotive technology will bring a revolutionary change in fuel demand, including an increasing disparity of demand between fuel types: diesel volumes will be buoyed by heavy duty transportation use while gasoline will decline due to increasing powertrain efficiencies and higher pump blends of bio-ethanol. Further, improved supply prospects for natural gas are likely to lead to decoupling of oil and gas markets, according to the study.
The world is nearing a paradigm shift in oil demand. The predominant role of oil in the global energy mix is facing an ever greater challenge from a number of emerging trends. Over the past few years a near “perfect storm” for oil demand has been forming and gathering strength, created by a preoccupation in many quarters about the availability of future supplies.
As a result, the drivers working against oil demand growth are increasing in number and intensity, with the world’s consuming nations increasingly focussed on their need to reduce their dependency on oil, supported by an ever stronger legislative framework.—Peter Hughes, managing director of the Energy Practice of Ricardo Strategic Consulting
Summary of key findings of the research project:
The approaching peak in oil demand. The study findings suggest that there is a strong chance of oil demand reaching its peak before 2020, at no more than about 4% above 2010 levels, before falling into a long-term decline trend, with demand in 2035 back down to some 3% below 2010 levels. This would also involve significant changes in the geographic distribution of demand and the mix of refined products required by the market. After incorporating a greater take-up of first-generation biofuels, demand for hydrocarbon oil by 2035 may actually be more than 10% below its 2010 level, and its share of global energy demand fallen below 25% (from circa 33% today).
Regional differences and legislation. Oil demand growth will have its limits in every country. Ricardo believes that there has been a general underestimation of the future impact of government policies to improve fuel efficiency and promote alternatives to oil. This will be the case everywhere, including, very importantly, in China, where although demand is projected to grow by nearly 60% in the meantime, the study assesses that a peak could be reached as early as 2027, before starting to fall back thereafter.
The effect of fuel-efficient technology. Evolutionary change in the automotive sector will bring about a revolutionary change in fuel demand. The transportation sector will continue to see significant growth in the vehicle fleet, increasing by over 80% from 2010 to 2035. However, the results of a detailed modeling exercise suggest that efficiency improvements in the internal combustion engine will more than offset the rise in fuel demand deriving from the increase in the number of vehicles.
Although new technologies, such as the battery electric vehicle, will be introduced and will have an increasing impact over time, the projected reduction in road transport oil demand does not derive primarily from the rapid penetration of such technologies.
The impact of biofuels. When considering the outlook for biofuels, the study concludes that the food vs. fuel argument may be poorly supported; for much of the last three decades, the agricultural sector has been constrained more by under-investment than by supply. If crop yields increase at historic rates, there will be enough surplus conventional fuel crops to displace a significant amount of fossil fuels. More than likely, the higher current selling prices will drive investment in production and research to further increase yields, making more sugar, starch and biomass available for conventional biofuels production.
As a result, the study projects that the production of first-generation biofuels may increase by 5-6 times over today’s levels, without allowing for any additional contribution from advanced biofuels, whose prospects remain uncertain.
Improved gas supply outlook decouples the oil and gas markets. Ricardo believes the improving supply outlook for natural gas, with the potential for the surge in shale gas production in North America to be replicated elsewhere over time, and a gradual introduction of a more competitive market pricing dynamic in world gas trade, is likely to drive an increasing disconnect of the gas price from the oil price, encouraging substitution of oil in both stationary and on-road transportation (i.e. natural gas vehicles) sectors.
Diesel and gasoline demand disparity. As regards the downward pressure on transportation fuels, the study assesses the impact as being far more pronounced in terms of gasoline demand than diesel, which will provide a supply side challenge to the world’s refining business. The industry may need to make significant investments to match production with demand, particularly to balance gasoline and distillate production.
Following completion of the research, the full report of the study has been provided to the original participants and is now available to new organizations wishing to subscribe to the study.