Economics, Not Politics, Drive Oil Demand

Oil demand is a "growth story" as fuel demand shifts internationally, said Rice University's Kenneth Medlock at the recent SPE/IADC International Drilling Conference and Exhibition.

Industrial oil rig offshore platform construction site on the North Sea coast
Source: piola666/Getty Images

The notion of imminent peak oil demand is unfounded, with hydrocarbons set to remain a crucial component in the energy mix for the foreseeable future, according to Rice University’s Kenneth B. Medlock.

He is the James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics at the Baker Institute and the senior director of the Center for Energy Studies at Rice University.

"This is a growth story,” said Medlock at the recent SPE/IADC International Drilling Conference and Exhibition held in Galveston, Texas.

He emphasized that oil demand continues to grow, particularly as fuel demand shifts globally.

Annually, demand has increased by about 1 million B/D since 2000 and it is only set to grow, according to the Organization of the Petroleum Exporting Countries (OPEC). Its monthly market report for March forecasts that world oil demand will rise by 2.25 million B/D in 2024 and by 1.85 million B/D in 2025, unchanged from last month’s forecast.

Additionally, crude production in the US topped an average of 13.3 million B/D in December according to the latest estimate from the US Energy Information Administration. The new figure, both a global and US record, is about 300,000 B/D above the nation’s pre-COVID 19 pandemic November 2019 peak.

Terry Palisch, 2024 SPE president and vice president of technology and engineering for CARBO Ceramics, noted in his keynote remarks at the event that there are realities about energy that need to be understood.

The world population continues to grow, with forecasts of 2 billion more people by 2050, and will “push energy demand,” he said, noting that about 60% of the global population lives in “some form of energy poverty: either not accessible, not affordable, or not reliable.”

The world needs accessible and affordable energy that is reliable and secure as well as green and decarbonized, Palisch added.

“People call it a trilemma because I think a lot of people think you can't have all three. But I think that this is actually the opportunity for our profession and for those of us in our industry,” he said. “We have a lot of work to do. We have yet to transition away from anything, including wood and biomass. So, I think that we have a lot of running room in our industry.”

According to Medlock, the Organization for Economic Cooperation and Development (OECD) countries have experienced a slight decline in demand over the past 2 decades due to factors such as efficiency improvements, slower economic growth, aging populations, adoption of electric vehicles, and policy changes. Non-OECD countries have witnessed significant economic growth, industrialization, consumerism, demographic shifts, and energy transitions.

Medlock asserted that a near-term peak in oil demand is unlikely as long as non-OECD demand growth outpaces the decline in OECD countries. Additionally, he highlighted that about 67% of oil production is partially owned by nations that heavily rely on the revenue generated from oil exports. Consequently, these countries are unlikely to abruptly cut off oil production in the next decade.

He said the supermajors collectively contributed only 10% of global oil output in 2022, a fraction of the production by the world's largest national oil company, Saudi Aramco.

While diversification efforts and exploration of new growth opportunities are underway, Medlock noted that the complete cessation of oil production within the next 10 years is highly improbable.

“Do you think oil is going away,” he asked the audience. “It is incredibly important for the budgets and the social programs of these governments. It's not disappearing. Will they seek to capture new margins of growth? Absolutely. And that's exactly what you're seeing. But will they completely cut this off in the next 10 years? Absolutely not,” he said.

Regarding the energy transition, he acknowledged the potential of geothermal as a “really cool technology, with some of the advanced geothermal technologies being developed are really promising.” However, he added that “there’s still a technology hurdle.” In the meantime, all the “incumbent demand sources need to be satisfied,” and they’re looking to oil and gas to meet that demand, Medlock said.

“It is not politics,” he said. “This is economics.”