Ricardo Study Suggests Global Oil Demand May Peak Before 2020
Automotive industry consulting firm Ricardo Strategic announced on November 7 the results of a multi-client research study conducted by Ricardo in association with Kevin J. Lindemer LLC, and involved participation of some of the world's leading energy and technology companies and organizations. The research challenged the concept that "Peak Oil" will be a supply side phenomenon and predicts that the demand for oil may well peak before 2020 and then fall back to levels significantly below 2010 demand by 2035.
"The world is nearing a paradigm shift in oil demand," said 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."
The study predicts significant changes in future demand patterns, strongly influenced by global energy security policies, the technology change that they promote, and demographics. Changes in automotive technology is predicted to bring changes in fuel demand. The increasing disparity of demand between fuel types, diesel volumes are buoyed by heavy duty transportation use while gasoline declines due to increasing powertrain efficiencies and higher pump blends of bio-ethanol. The study also predicts improved supply prospects for natural gas likely to lead to decoupling of oil and gas market.
"As a result, the drivers working against oil demand growth are increasing in number and intensity, with the world's consuming nations increasingly focused on their need to reduce their dependency on oil, supported by an ever stronger legislative framework," added Hughes.
Summary of key findings of the research project:
- The approaching peak in oil demand: The study findings suggest that there is a strong chance of oil demand reaching its peak before 2020, at no more than about four percent above 2010 levels, before falling into a long-term decline trend, with demand in 2035 back down to some three 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 ten percent below its 2010 level, and its share of global energy demand fallen below twenty-five percent (from circa thirty-three percent today).
- Regional differences and legislation: 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 sixty percent in the meantime, the study assesses that a peak could be reached as early as 2027, before starting to fall back thereafter.
- The effect of fuel-efficient technology: Change in the automotive sector will bring about a change in fuel demand. The transportation sector will continue to see significant growth in the vehicle fleet, increasing by over eighty percent from 2010 to 2035. However the results of a detailed modeling exercise 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.
- The impact of biofuels: 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.
- Improved gas supply outlook decouples the oil and gas markets: The study suggests that 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.
- Diesel and gasoline demand disparity: 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.