Energy Musings - July 15, 2024

Every forecast is built on a list of critical assumptions. That is particularly true for oil market predictions. What is economic growth? How will EVs impact gasoline demand. These are just two.

Peak Oil Forecasts Depend On Assumptions

Recently, the International Energy Agency roiled the oil world with its forecast of a peak in oil demand by 2030.  The IEA wrote, “Increased use of EVs, emerging clean energy technologies and more expansive efficiency policies are combining to chart a much slower growth trajectory for oil demand, plateauing towards the end of our 2023-2030 forecast period.”  

Likewise, BP plc’s latest 2024 Energy Outlook suggests an oil demand peak is on the horizon.  It noted that global oil use topped 100 million barrels a day in 2023.  Based on the company’s current trajectory model, BP sees consumption remaining around 100 million barrels a day until 2035 before starting to decline.  Since their report is designed to provide a broad scope of the economic and energy forces shaping the global energy market rather than providing specific volumes at specified dates, BP only gives rough numbers and only at the start and end.  To prepare the report, BP runs multiple model simulations recognizing that individual forecasts are almost always wrong, but trends can be captured with their outcome sketched out. 

At the same time, OPEC’s latest monthly report and forecast reiterate the organization’s strong oil demand growth estimates for 2024 and 2025.  It sees oil consumption growing by 2.2 million barrels a day in 2024 and another 1.85 million barrels a day in 2025. 

Last June, investment banker Goldman Sachs weighed in with its long-term outlook for oil demand.  The firm’s report was titled “Peak oil demand is still a decade away.”  Their report was published shortly after the IEA’s peak oil forecast.  They even referenced the IEA without naming it.  They wrote, “[S]ome prominent forecasters have predicted oil demand will peak by 2030.”  Due to demand from emerging markets in Asia and increased petrochemical demand, oil use will continue rising through 2034, wrote Goldman.  It also pointed to “lackluster” EV sales, rising incomes, and growing demand for improved living standards globally pushing energy needs that “will be met primarily with more fossil fuels.” 

The key difference between Goldman and other forecasters is the firm’s view of oil demand after the peak.  According to Nikhil Bhandari, co-head of Asia-Pacific Natural Resources and Clean Energy Research, and analyst Amber Cai writing in Goldman’s report, “We think peak demand is another decade away, and more importantly, after the decade it takes to peak, it plateaus, rather than sharply declines, for another few years.”  In other words, the trends that cause oil consumption to peak will not stop allowing oil consumption to collapse immediately. 

Goldman’s forecast shows this reality. 

Goldman sees oil demand peaking in 2035 but importantly does not foresee a consumption collapse after.

With EV adoption a key variable in Goldman’s oil demand forecast, it prepared a chart showing the impact of various rates of EV adoption on global oil demand.  The chart shows annual global oil demand in millions of barrels a day.  The difference between the EV slow- and the hyper-adoption cases is roughly 10 million barrels a day or about 10% of total oil consumption.  Certainly, the EV hyper-adoption case shows an impact, but oil demand would still be at about the early 2020s level 20 years later.  This is not the cataclysmic outlook environmentalists desire and often predict.  The EV slow-adoption case also highlights that global oil demand could continue to grow until 2040 at least.  This possibility will freak out the End Fossil Fuels Now crowd. 

The Oil used to power vehicles will be impacted by growth in the world’s EV fleet. Here are Goldman’s possible scenarios and their impact on global oil demand.

Goldman further noted that even if gasoline consumption peaked in 2028, petrochemical demand growth could more than offset the subsequent gasoline demand decline through 2040.  People often forget the importance of petrochemicals in everyday life.  With world GDP per capita rising, people will need more products made from petrochemical feedstocks such as fertilizers, plastics, medicines, and clothing.