When will the market face peak demand?

EDINBURGH/HOUSTON/SINGAPORE, 16 October 2017: The market is no stranger to peak oil. But industry focus is shifting from concerns about peak oil supply to a more concrete threat– peak demand. The Rise and Fall of Black Gold, released today by Wood Mackenzie, is a comprehensive, cross-commodity, cross-value chain analysis of peak demand. The report identifies the drivers as well as the potential impact of this global transformation – across regions, sectors, and fuels.

Wood Mackenzie argues that the market faces a number of fundamental structural changes: the story is not one of a simple peak and decline.

Transport fuel demand, for example, highlights the challenges facing the oil market. Of the 96 million barrels per day (b/d) consumed worldwide, almost 60 million b/d of that demand comes from the transport sector.

Technological advances, both in fuel efficiency and in hybrid and electric vehicles, will erode demand for transport fuels. But that erosion will not be felt uniformly across the world. The rise of electric vehicles and renewable energy explains some of the widening divide between developed and emerging economies.

Demand across the OECD will revert to structural decline by 2020, wiping out about 4 million b/d of demand by 2035. Throughout the decade from 2020, a combination of factors, including electric vehicle take-up, as well as government policies and a mature transport sector, will lead to declines in OECD transport oil demand.

In contrast, Wood Mackenzie expects demand in non-OECD economies to grow by nearly 16 million b/d by 2035, due in part to rising income levels and a growing middle class boosting demand for transport fuel. On top of this, demand for consumer goods, including plastics, and the need to move freight in an increasingly consumer-driven world, will also contribute to non-OECD oil demand. Non-OECD demand growth slows from 2030, driven by a stall in oil demand growth in China.

The petrochemical sector is one of the few bright spots for oil demand. Petrochemical feedstocks make up just over 10% of total oil demand at present, but Wood Mackenzie sees significant growth over the next 20 years. Feedstocks are forecast to add 6 million b/d to total demand by 2035 – an increase of 50% from today's feedstock demand.

Demand from all other sectors accounts for the remaining 30% of total oil demand. A continued decline in demand for oil in the power generation sector offsets modest increases from the other sectors, leaving demand in this combined category approximately flat through 2035.

Wood Mackenzie does not foresee peak oil demand before 2035. But we are seeing facets of peak oil demand already. We see oil demand in transport flatline from 2030, driven by a peak in gasoline demand late next decade.

Marine bunker fuel demand is also expected to peak in the middle of next decade. Although oil demand grows to 2035 on aggregate, growth is minimal compared to what we have seen over the past 20 years.

The prospect of peak oil demand is very real. The oil industry is right to be concerned and needs to plan for the changes and challenges ahead.