We are closer to bulls than bears on …
Given the debate on achieving net zero carbon emissions by 2050, many analysts find it difficult to forecast demand for oil. Rather than projecting a base storyline, most just raise their hands and choose to present a variety of storylines instead.
This is the gap we aim to close in our latest Energy Observer by providing a high quality baseline forecast. We aim to tackle what we believe will actually happen to oil, not what is necessary to achieve decarbonization or other goals.
We expect oil demand to peak around 2030, with demand only gradually declining thereafter – an overall drop of 11% through 2050, as shown below. This forecast of oil demand comes despite our optimistic views on electric vehicles (which will reduce demand for on-road fuels) because not all parts of oil demand can be electrified.
Overall, this brings us closer to increases rather than decreases in demand for oil.
Our views on oil demand versus consensus by sector
- Passenger cars / light vehicles: Our bullish views on electric vehicles lead us to be well below the consensus status quo scenario. We predict that electric vehicles will reach 57% of the vehicle fleet by 2050, which in turn will bring the oil demand for this sector to 26% of its 2018 level. However, we are above the bearish average consensus, mainly because we are much more pessimistic about the efficiency gains of vehicles with internal combustion engines, or ICEs. Consensus can be misled on this issue due to erroneous data. Efficiency gains for ICE vehicles in the real world have lagged far behind officially reported values ââover the past 20 years, a fact that has been almost entirely overlooked by other forecasters.
- Road freight: We forecast that in 2050, oil demand in this sector will be 16% of its 2018 level, a vision that brings us closer to the bears. Indeed, conventional wisdom is relatively pessimistic about the electrification of freight trucks, while we believe that freight trucking (including, possibly, long haul) is actually an ideal candidate for electrification.
- Ships and planes: With a forecast that oil demand in 2050 will be 13% of its 2018 level, we are even far from the business-as-usual consensus average in this sector. The consensus view of the status quo incorporates very optimistic assumptions about efficiency gains as well as unduly pessimistic views on air transport and ocean freight volumes. For airplanes, we see very little capacity for oil to be disrupted by alternative fuels due to exorbitant costs. For ships, we believe the displacement of oil by green ammonia will be modest.
- Petrochemical raw materials: Here, we forecast that oil demand in 2050 will be 12% of its 2018 level. This means that we are well above the status quo average despite our optimistic assumptions about recycling use (which will reduce demand for virgin plastics). The consensus forecast here is generally sparse, but it appears to imply demand for plastics well below historical trends as well as unrealistic assumptions about recycling.
Oil demand forecasts by product
We also break down our views on oil demand by product, which flow from our industry forecast, in the chart below. For example, gasoline demand is virtually synonymous with light vehicle fuel, just like jet fuel and aviation fuel.
We expect the demand for oil to peak around 2030. After that, the demand will fall, as the penetration of electric vehicles in cars and trucks will rapidly reduce the demand for gasoline and diesel. Nonetheless, the rate of decline in total oil demand will be moderated by continued growth in demand for jet fuel and petrochemicals.
Oil demand by geography: the impact of emerging economies
We also discover additional information when we explore the demand for oil through a geographic lens.
We forecast that emerging economies will grow from 53% of oil demand in 2019 to 66% of demand in 2050. In particular, we forecast that demand from emerging economies excluding China will grow by 19% cumulatively by 2050 per year. compared to 2019 levels, while demand from China contracts 17%. Demand for the United States, Europe and other advanced economies fell 35%.
China is getting a lot of attention from the oil markets, reflecting the fact that it accounted for over 40% of the growth in oil demand from 2000 to 2019. Now the narrative has shifted as China has shifted to power. peak in electric vehicle adoption and other trends. which will reduce the demand for oil.
However, we don’t expect weaker demand from China to be a harbinger for other emerging economies. In particular, China’s aggressive push into electric vehicles reflects idiosyncratic motives (namely the desire to dominate the global electric vehicle industry) that are less applicable to other emerging economies. Additionally, we believe other emerging economies are less likely to have the state capacity to electrify cars, trucks, and other industries as aggressively as China currently does.
Another factor that differentiates our view of emerging economies from advanced economies is quite simply the growth of gross domestic product. Like most economists’ forecasts, we expect much faster GDP growth for emerging economies by 2050.
Carbon policy will partly shape the future of oil demand, but the cost is greater
Our framework in this report focuses on the long-term cost trends of potential clean technologies to replace petroleum. In contrast, we believe that policy changes are less important in determining the future of oil demand. This is for two reasons:
- We do not expect very large increases in carbon taxes or other policies that impose massive costs on consumers, because we do not believe that such policies will be politically acceptable in many areas.
- The impact of a given carbon tax or other policy on the demand for oil is determined by the extent to which green technologies are a good cost-effective substitute for oil. Substitutability determines the price elasticity of oil demand, which determines the impact of carbon policies on oil demand. Thus, cost trends determine to what extent carbon policies will even have an impact, if implemented. If no good substitute for oil is available, then the price elasticity of demand will be relatively low, limiting the impact of carbon policy. On the other hand, if petroleum substitutes are able to achieve cost parity (as we would expect with electric vehicles), then even soft policy interventions can make a big difference.
That said, strong demand for oil makes the hunt for clean energy, as well as carbon capture technologies, even more urgent.
This year, at the COP26 climate summit, countries agreed to commit to reducing carbon, responsible for global warming, by replanting forests and reducing emissions of methane, one of the greenhouse gases. the most dangerous. Next year, they will meet again with the aim of declaring stronger goals focused on achieving net zero emissions by 2050.
But the emissions exceed global plans to limit global warming. At the end of October, a United Nations report found that current emission reduction commitments still leave the world on track for a global temperature rise of at least 2.7 degrees Celsius this century, even as countries have sought to cap this increase at 2.0 degrees or less.
But we urge investors to be cautious about expectations regarding these targets. While some oil demand forecasts assume that the targets set in the 2015 Paris Agreement will be met (including net zero emissions by around 2050), our forecast is a realistic assessment of the policies that will be implemented. . The failure of earlier goals (like the Kyoto Protocol of the 1990s) demonstrates that we must not take for granted that today’s ambitious goals will be met.