The multi-client research study conducted by Ricardo Strategic Consulting was launched in June 2011 in association with Kevin J. Lindemer LLC, and involved participation of some of the world’s leading energy and technology companies and organizations.
“The world is nearing a paradigm shift in oil demand,” explains Peter Hughes, managing director of the Energy Practice of Ricardo Strategic Consulting. “The predominant role of oil in the global energy mix is facing an ever greater challenge from a number of emerging trends. Over the past few years a near ‘perfect storm’ for oil demand has been forming and gathering strength, created by a preoccupation in many quarters about the availability of future supplies.
“As a result, the drivers working against oil demand growth are increasing in number and intensity, with the world’s consuming nations increasingly focussed on their need to reduce their dependency on oil, supported by an ever stronger legislative framework. In this study we have drawn upon our deep understanding of both the energy and automotive and transportation industries, to take a fresh and insightful look at how the future of oil demand may unfold. This work has provided some unique and potentially very provocative conclusions that will be of keen interest to governments, energy sector companies and investors, and to the sector’s major consumers in all parts of the world.”
The study findings suggest that there is a strong chance of oil demand reaching its peak before 2020, at no more than about 4 percent above 2010 levels, before falling into a long-term decline trend, with demand in 2035 back down to some 3 percent below 2010 levels. This would also involve significant changes in the geographic distribution of demand and the mix of refined products required by the market. After incorporating a greater take-up of first generation biofuels, demand for hydrocarbon oil by 2035 may actually be more than 10 percent below its 2010 level, and its share of global energy demand fallen below 25 percent (from circa 33 percent today).
Oil demand growth will have its limits in every country. Ricardo believes that there has been a general underestimation of the future impact of government policies to improve fuel efficiency and promote alternatives to oil. This will be the case everywhere, including, very importantly, in China, where although demand is projected to grow by nearly 60 percent in the meantime, the study assesses that a peak could be reached as early as 2027, before starting to fall back thereafter.
Evolutionary change in the automotive sector will bring about a revolutionary change in fuel demand. The transportation sector will continue to see significant growth in the vehicle fleet, increasing by over 80 percent from 2010 to 2035. However the results of a detailed modelling exercise drawing on Ricardo’s deep expertise in this field suggest that efficiency improvements in the internal combustion engine will more than offset the rise in fuel demand deriving from the increase in the number of vehicles. Although new technologies, such as the battery electric vehicle, will be introduced and will have an increasing impact over time, the projected reduction in road transport oil demand does not derive primarily from the rapid penetration of such technologies.
When considering the outlook for biofuels, the study concludes that the food vs. fuel argument may be poorly supported; for much of the last three decades, the agricultural sector has been constrained more by under-investment than by supply. If crop yields increase at historic rates, there will be enough surplus conventional fuel crops to displace a significant amount of fossil fuels.
And more than likely, the higher current selling prices will drive investment in production and research to further increase yields, making more sugar, starch and biomass available for conventional biofuels production. As a result, the study projects that the production of first generation biofuels may increase by 5-6 times over today’s levels, without allowing for any additional contribution from advanced biofuels, whose prospects remain uncertain.
Ricardo believes the improving supply outlook for natural gas, with the potential for the surge in shale gas production in North America to be replicated elsewhere over time, and a gradual introduction of a more competitive market pricing dynamic in world gas trade, is likely to drive an increasing disconnect of the gas price from the oil price, encouraging substitution of oil in both stationary and on-road transportation (i.e. natural gas vehicles) sectors.
As regards the downward pressure on transportation fuels, the study assesses the impact as being far more pronounced in terms of gasoline demand than diesel, which will provide a supply side challenge to the world’s refining business. The industry may need to make significant investments to match production with demand, particularly to balance gasoline and distillate production.