The Oil Demand Downshift

The International Energy Agency in Paris (IEA) released its oil outlook this week, Oil 2017, warning that demand may begin to outpace supply by 2020 if the global oil industry doesn’t start investing again.

But what if the oil industry is right to not invest? The most important data point in the IEA’s report was their forecast for oil demand growth: 1.2%, on average, over the next 5 years. If that forecast turns out to be accurate—and I think it will—then the next five years will see the same sluggish demand growth as the past five. And on a longer timeline, it represents a major downshift from the kind of demand growth the industry used to enjoy. | see: Compound Annual Growth Rate of Global Oil Demand During Five Year Periods 1985-2015 | Forecast 2016-2020.

The transition from an era when oil demand growth tended towards 2.00% to a time when it tends towards 1.00% is the driver behind the most lively argument in the oil sector today: peak oil demand. Just about every oil-focused energy analyst is trying to model when policy, urban demographic shifts, and the rollout of electric vehicles will take oil demand growth down to zero.

So what are the risks? Right now, you would have to locate the greatest upside risk to global oil demand in Asia—in particular, overall economic growth in China and India. While it would not be possible for China or India to replicate the 20th C experience with the automobile seen in the West, oil adoption is still underway in Asia. But downside risks to oil demand are real too. Indeed, if we bundle the lower operating costs of EV with their higher price, the discount that currently supports ICE vehicle sales is fading rapidly. Risk is growing that EV sales will take off, accelerate, and start to dominate many markets in a disruptive trajectory.

But there’s a larger point to be made in these equations. Oil demand growth at this lower bound has already put the price of oil, and the industry, in a vulnerable position. Remember what happened to the coal industry. After supersizing itself to the greatest heights of demand ever, between 2000 and 2013, global demand growth for coal turned flat. And now the coal industry in tatters.

The global oil industry doesn’t need to reach peak demand growth to run into severe problems. Once demand growth falls below 1.00% and stays there, the price of oil is going to find a new lower band as well, and it’s likely $10 away from current prices to the downside.

–Gregor Macdonald

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