How Close Are We To Peak Oil Demand?

Editor OilPrice.com
Sun, June 5, 2022

Two years ago, British oil and gas supermajor BP Plc. (NYSE:BP) sent shockwaves through the energy markets after it declared that the world was already past Peak Oil demand. In the company's 2020 Energy Outlook, chief executive Bernard Looney pledged that BP would increase its renewables spending twentyfold to $5 billion a year by 2030 and "... not enter any new countries for oil and gas exploration".

That announcement came as a bit of a shocker given how aggressive BP has been in exploring new oil and gas frontiers.

When many analysts talk about Peak Oil, they are usually referring to that point in time when global oil demand enters a phase of terminal and irreversible decline. According to BP, this point has already come and gone, with oil demand slated to fall by at least 10% in the current decade and by as much as 50% over the next two. BP noted that historically, energy demand has risen steadily in tandem with global economic growth with few interruptions; however, the COVID-19 crisis and increased climate action might have permanently altered that playbook.

However, BP has been forced to do a mea culpa after it became clear that the COVID-19 pandemic that began more than two years ago has not resulted in a significant reduction in oil demand.

In its Energy Outlook 2022 edition, BP has revised down its forecast for global economic growth saying global GDP will only contract 1.5% by 2025 from 2019 levels compared to its earlier projection of a 2.5% contraction.

BP notes that its former grim outlook was prepared prior to the Russian invasion of Ukraine-- another black swan event--which has driven global energy prices higher and cast an uncertain shadow over Russia's oil and gas sector in recent months.

The Scenarios

In its latest report, BP offers three scenarios--all foresee oil demand surpassing pre-pandemic levels by the middle of this decade before beginning to slip to varying degrees.

In the most bullish case for oil, BP projects that crude demand will rise to 101 million b/d in 2025 and remain flat into 2030. After that point, global demand retreats to 98 million b/d by 2035 and to 92 million b/d by 2040.

In yet another scenario that BP has termed "net-zero," which is the most aggressive in terms of global climate ambitions being achieved, the company pegs 2025 demand at 98 million b/d and just 75 million b/d by 2035. BP assumes that a 95% reduction in greenhouse-gas (GHG) emissions must be achieved for the net-zero predictions to come true.

In the middle-of-the-road scenario, BP assumes that the world will still be broadly in-line with climate goals but with a 75% reduction in GHG emissions by 2025. This picture of the future suggests that oil demand will be around 96 million b/d in 2025 and 85 million b/d by 2035.

However, recent events in the energy sector suggest that oil companies might get a leeway to grow production and even relax climate goals as long as oil and gas prices remain high.

Last year, Exxon Mobil (NYSE:XOM) found itself in trouble after a tiny hedge fund by the name Engine No. 1 successfully waged a battle to install three directors on the board of Exxon with the goal of pushing the energy giant to reduce its carbon footprint. Engine No. 1 enjoyed the stunning victory thanks to support from BlackRock, Vanguard and State Street who all voted against Exxon's leadership.

Luckily, Exxon has finally managed to turn the tables and get shareholders on its side: last week, Exxon recorded a major victory after its shareholders supported the company's energy transition strategy at the annual general meeting.

Only 28% of the participants backed a resolution filed by the Follow This activist group urging faster action to battle climate change; a proposal calling for a report on low carbon business planning received just 10.5% support, while a report on plastic production garnered a 37% favorable vote.

In other words, it appears that Exxon's legacy fossil fuel business remains safe, at least for now, as long as it keeps returning that excess cash to shareholders in the form of dividends and buybacks.

Just like its bigger peer, Chevron Inc.(NYSE:CVX) shareholders voted on Wednesday against a resolution asking the company to adopt greenhouse gas emissions reductions targets, indicating support for the steps the company already has taken to address climate change.

Just 33% of shareholders voted in favor of the proposal, according to preliminary figures disclosed by the company, a sharp turnaround from last year when 61% of shareholders voted to support a similar proposal.

Meanwhile, Hess Corp. (NYSE: HES) has broken with the industry trend of returning excess cash flows to shareholders after announcing plans for massive capex spending in a bid to boost production. Hess has announced a 2022 capex budget of $2.6b; good for a 37% jump, with Bakken spend up 75% to $790m. In the Bakken, Hess plans to run three rigs to achieve its 168kb/d production target.

Changing Map

In yet another report published in the Geopolitical Intelligence Services blog , Carol Nakhle, CEO of Crystol Energy, says the consensus is that global oil consumption will peak within the next 20 years, but demand will not necessarily fall off a cliff thereafter.

Nakhle notes that in OECD countries, oil demand peaked in 2005 at around 50 million barrels per day. What has been driving the growth in global demand is the developing world, primarily Asia (mainly China and India – the second- and third-largest oil consumers in the world after the United States) and the Middle East (led by Saudi Arabia, which is also the sixth-largest consumer in the world). In fact, between 2009 and 2019, almost all the growth in global oil demand was driven by the developing world, with Asia expected to continue to be the growth center in the coming years. Non-OECD countries account for ~54% of global oil consumption.

Nakhle says, "…after peak oil demand is reached, it will at some point plateau and then shrink. In a growing market, there is space for everyone. In a shrinking market, for one country to increase production, supply from another country is squeezed out, usually done by price competition. In such a world, market power will shift toward consumers. Today they are desperately looking for oil; tomorrow they will be in a much stronger position."

She says that once global oil demand peaks and starts to fall, competition among producers to sell more oil and safeguard market share will intensify. In a stagnant or shrinking market, oil and gas producers will face new rules, very different from the ones they have been accustomed to. For instance, OPEC's strategy of cutting supplies to increase prices or Russia threatening to cut its supplies to keep sanctions off its oil exports will no longer be effective. To be fair, higher prices will attract additional production, as it always does. However, In a shrinking market, this will force prices lower, and any deliberate attempts to cut production to raise prices would simply backfire.

In the end, the consumer will end up holding most of the chips.

By Alex Kimani for Oilprice.com