Transportation is the linchpin of oil consumption, responsible for more than 50% of the oil that the world uses every day and almost 70% of that consumed daily in the United States. Forecasters all agree that the global vehicle fleet, the dominant factor in transportation demand for oil-based fuels and the major source of transport-sector growth, will expand greatly in the next 20 to 30 years.
Thus, it is notable that BP in its 2017 Energy Outlook forecasts, as a base case, that by the mid-2030s, transport demand growth for oil will slow to a trickle, while demand for noncombusted oil use—particularly in the petrochemicals industry—will become the chief driver of oil demand growth.
Specifically, over the outlook period of 2017–2035, the growth in transport demand will decelerate from 1 million B/D per year to 0.4 million B/D per year and level off, while the demand for noncombusted oil use will increase by 6 million B/D.
Not every forecast agrees with this. The International Energy Agency and ExxonMobil, for example, believe that transport demand will continue to drive oil consumption growth for substantially longer. On the other hand, Shell Chief Executive Officer Ben van Beurden recently said that oil demand as a whole could peak in the early 2030s and possibly sooner with higher biofuel use. There are forecasts from outside the industry that show oil demand peaking and starting to decline sooner rather than later.
Implications for Industry
The point is not that one forecast or the other is correct, but rather to start thinking about the implications of a transport demand for oil that no longer increases. It is bound to happen at some point, even if the more robust demand forecasts prove correct. What will the industry begin to look like when transport no longer delivers market growth?
But first, what is the case for anticipating a slowing and leveling in transport demand by approximately 2035?
“It’s largely the significant improvement in the fuel efficiency of the world’s vehicle fleet,” said Mark Finley, general manager of global energy markets and US economics at BP, who was on the team that produced the latest Energy Outlook.
Vehicle Fleet Growth
“The growth of the vehicle fleet will remain robust as many people join the middle class over the next 20 years and can afford to buy cars,” he continued. “But mainly due to policy pushing for greater fuel efficiency, we’re projecting that the average car will go from about 30 miles a gallon in fuel efficiency currently to about 50 miles a gallon 20 years from now.”
While the Trump Administration in the US is looking at weakening fuel-efficiency standards for future new car models, Finley indicated that such a move might not affect the outlook projection very much because US new vehicle fuel efficiency has already been deteriorating for several years. It is the market rather than regulatory reasons that have brought this about, as low gasoline prices have stimulated sales of larger vehicles, he noted.
US Only One Piece of Puzzle
“There are fuel-efficiency standards in Europe and even in China that are on the books and are very aggressive,” Finley said. “So what happens in the US is only one piece of a much bigger puzzle.”
As for the projected market expansion for the use of noncombusted oil, primarily as petrochemical feedstocks, he said, “It’s simply the continued growth in the world economy. These are the basic building blocks of the economy, and they grow more or less in line with it. They also have few substitutes in their many applications.”
Crude oil, particularly its light fractions and condensate, would compete with natural gas sources, such as gas liquids and liquefied petroleum gases, in the chemical feedstock markets. This competition already takes place and is strongly affected by relative prices throughout global markets, Finley said.
Gas vs. Oil for Feedstocks
For example, the shale revolution has yielded an abundance of gas-based feedstocks that has spurred the considerable expansion—and even global insourcing—of chemical production in the US. However, many markets elsewhere are characterized by high natural gas prices, which in some cases are indexed to oil in long-term contracts, and oil-based feedstocks may have a competitive advantage.
Finley noted that the growing exports of US natural gas, principally through liquefaction and regasification, will help in the long run to cause gas prices globally to converge.
He stressed that there is more to the outlook than the base case that has principally drawn attention.
Base Case Uncertainty
“The approach we bring to our Energy Outlook is not to focus too much on the base case because it’s so tremendously uncertain,” he said. “We like to do a base case to force ourselves to make our choices. But we don’t want to be too confident in it. We have to place some uncertainty bands around it.”
The Energy Outlook projects continued growth in oil demand through 2035, even with slowing transport demand, with overall oil consumption potentially peaking in the mid-2040s and then starting to decline.
However, there are alternative cases that weigh differing plausible scenarios for
- Economic growth
- Fuel-efficiency improvement
- The speed and shape of the mobility revolution, including the uptake of electric and alternative-fuel vehicles, autonomous vehicles, car sharing, and ride pooling
- Climate policy
The outcome of these cases could lead to an earlier or later peak oil demand.
“Although the eventual peak in oil demand will be symbolic of a world transitioning away from oil, it would mark only the first point of decline,” the outlook said. “Oil is likely to remain a significant source of global energy consumption for many decades.”
For Further Reading
BP. BP Energy Outlook 2017. (accessed 3 August 2017).
