Oil Demand and Prices: Where Next?
Dr Edward Libbey
When will we really reach Peak Oil?
Just in time for Energy Week in London (formerly IP Week) at the end of February, Vitol has published, for the first time, its long-term oil demand outlook. There is a fairly clear consensus amongst all analysts that we have almost arrived at the summit of “Peak Oil”. It was long believed that this peak would be driven by supply shortages, but over the past decade or two, this has shifted to a demand limitation. Vitol thinks this peak could be around 110 million bpd (mbpd), which is on the high side of most other forecasters: McKinsey suggested last September around 105 mbpd as the peak, and BP, a little earlier, suggested slightly less – both closer to today’s oil production number. There is then an expected demand plateau lasting through 2030, followed by a wide range of forecasts out to 2040 and 2050. The Net Zero objective is somewhat less than 30 mbpd, but I cannot find any forecaster who believes that is achievable. McKinsey and BP see a figure below 80 mbpd by 2050, whereas Vitol only projects to 2040, with very little decline by then.
The underlying energy situation is quite clear, though politics might wish it otherwise. Oil is a ubiquitous energy source – since the end of the Second World War, it has driven transportation, heating, and industry, and provided petrochemical feedstocks – and we are now seeking to replace all of those uses, but there is no single solution. Science, technology, engineering and innovation have or can produce the necessary solutions, but some will require time to scale up.
The Transition So Far
Electric vehicles are viable for cars and some forms of mass transportation, such as buses and; batteries can power some trains, and hydrogen will be a solution for certain heavy trucks and lorries. While hydrogen clearly works, its costs are several times those of petrol and diesel, and the distribution infrastructure still needs to be widely developed. As Vitol and others recognise, Sustainable Aviation Fuel (SAF) is clearly a possible substitute for the jet fuel used in aviation, but at two to four times the cost, as recently highlighted by Shell. Vitol foresees a 50% increase in jet fuel demand by 2040 and probable increases beyond that. While US oil companies have largely refrained from devoting significant resources to the energy transition, both Shell and BP have, but they have more recently scaled back their ambitions and investments in hydrogen, renewable power, and so forth. Biofuels are proven for road vehicles, but growing biofuel feedstocks competes for land with food production, and in the UK, we are already seeing the debate about land use for PV versus food production. Petrochemicals are widespread and, by definition, come from oil, and Vitol forecasts a 50% increase in petrochemical feedstock demand by 2040.
That said, there has been significant progress in the energy transition. Just looking at the UK, coal-fired power generation has been phased out over the past decade – a task some thought was undeliverable. There has been huge investment in solar and wind power generation, and electric car sales are about 20% of the total. On some days, UK power supply can be over 90% renewable, but on others, “dunkelflaute” has entered our dictionary – no sun, no wind, and the Grid operator raising alarm bells. Yet this conceals some issues: the UK has a mandated increase in EV car sales that manufacturers say cannot be met because the demand is not there; there was a major political row in Germany in the autumn when large domestic manufacturers announced plans for production plant shutdowns – within Germany itself – which were eventually cancelled after widespread political pressure. We now have a new driver concern – “range anxiety” – wondering if their EV can actually get them to where they need to be before the battery runs flat. Airbus has just announced the deferral of the ambition of a hydrogen plane by 2035 to sometime in the following decade. Carbon Capture and Storage, seen as a must for the transition, remains a challenge that the UK has been trying to stimulate for 20 years.
Policy Landscape and Geopolitical Risks
Globally, the IEA and others recognise the need for further policy implementation to reach ambitious carbon reduction targets. Perhaps the biggest risk and challenge is with the new US administration, which, prima facie, does not support the renewable initiatives underwritten by the Inflation Reduction Act passed by the prior administration. It seems unlikely that widespread financial or tax incentives will remain available to fund wind power or similar programmes, whereas support for further fossil fuel development may, in all probability, be maintained. Increased supply may depress prices, which will surely lead to greater use of oil than might have been assumed in, for example, recent IEA projections.
The Oil Supply Conundrum
Returning to oil supply and demand: while oil demand will decline gently after about 2030 (although experts differ on the exact rate), the natural decline of oil field production is much faster, so new field development – globally – will be essential unless the world simply stops using oil. There is little doubt that the resource exists, but as we have seen in the UK offshore sector, there are differing views on whether local development is justified. The decline in US supply and demand seems less likely, as noted above. Given current geopolitics, mutual reliance on global cooperation appears riskier than before, and UK development may need to be reinforced. While Vitol’s projections for oil demand are more bullish than most others, it is possible, in today’s global environment, that they might prove closer to the mark.
February 2025