The conventional wisdom among a number of leading energy companies, OPEC, and the International Energy Agency is that global oil demand will continue to rise strongly over the next two decades. Indeed, one particularly bullish projection is for demand to reach 115 million barrels a day in 2035, 25 percent above 2014’s 92 million barrels a day.
What if the consensus is wrong, though, and growth in global demand stands to be far lower? We see three powerful forces, in particular, that could weigh materially on demand growth.
The first is pending improvements in energy efficiency, especially in cars and, to a lesser extent, trucks. Compelled by tightening standards, vehicle manufacturers will be forced to make their vehicles increasingly efficient: the fuel economy of new vehicles is expected to rise by about 2.5 percent a year to 2035. This would translate into sizable decreases in oil demand. The net effects of heightened energy efficiency on oil demand from cars and trucks could, of course, be negated, to an extent, if oil prices were to remain low for an extended period. But we do not consider sustained low oil prices likely, at least currently.
The second factor that could dampen global demand growth for oil is increasing substitution of natural gas for oil in the transportation, power generation, and petrochemicals sectors, coupled with growing adoption of electric vehicles, hybrids, and fuel cell vehicles. Within transportation, the substitution of gas for oil stands to be particularly strong among truck fleets: using compressed natural gas in favor of oil can save fleets about 25 percent on fuel costs. Substitution will also be strong in marine shipping, where the recent introduction of new emissions standards for ships trading in designated emission-control areas (enacted under the International Convention for the Prevention of Pollution from Ships) stands to lead to increasing substitution of relatively clean-burning liquefied natural gas for fuel oil.
Within the petrochemicals sector, companies are likely to seek opportunities to substitute ethane-based ethylene for naphtha-based ethylene as a feedstock, as ethane prices have become increasingly attractive versus naphtha prices as a result of the U.S. shale-gas boom.
Combined, the substitution of natural gas for oil and the potential growing adoption of alternative vehicles (the adoption rate of electric cars, hybrids, and fuel cell vehicles is currently modest but could accelerate, at the expense of conventional combustion engines and fuel) will touch areas that currently account for about 70 percent of total global oil demand.
The third factor that has the potential to significantly reduce growth in oil demand is the rising institution of carbon-emissions targets. Oil is currently the source of an estimated 36 percent of the world’s CO2 emissions, and climate-change concerns are mounting globally. Hence, growing adoption of emissions targets, leading to a commensurate de-emphasis on oil, seems likely.
Considering the above, we may see a scenario in which daily oil demand in 2035 will be about 90 million barrels a day—below where it stood in 2014—or even lower. Time will tell, but we should be prepared for the possibility.
This blog was originally published by the Wall Street Journal.