I have been
hearing this for a few weeks now but is it true? Can it happen in just 5.5
years? I have got my doubts. Specifically, the IEA predicts that growth in oil
demand will be quashed by the accelerated energy transition. I have been
skeptical of IEA predictions before such as their overly bullish near-term view
of the development of hydrogen economies.
There is no
oil surplus now. OPEC-plus and other oil producers have been holding back
production to support robust oil prices as they tend to do. My personal concern
is gasoline prices. It would be nice if they were lower. An oil surplus can
make that happen, but it is not likely to affect them very much. Oil demand is
expected to drop, especially in OECD countries as it has since the mid-2000s. European
oil demand is expected to continue its drop that began about seven years ago. However,
in non-OECD countries and especially in Asia, oil demand is set to continue
rising as it has been since the mid-2000s.
Strong demand
from Asia and from the global aviation and petrochemical sectors are expected
to drive demand. Concurrently, demand is expected to be lowered by higher EV
adoption, fuel efficiency improvements in internal combustion engines,
declining use of oil for electricity generation in the Middle East, and other
economic changes.
“Despite
the slowdown in growth, global oil demand is still forecast to be 3.2 million
barrels per day higher in 2030 than in 2023 unless stronger policy measures are
implemented or changes in behaviour take hold. The increase is set to be driven
by emerging economies in Asia – especially higher oil use for transport in
India – and by greater use of jet fuel and feedstocks from the booming
petrochemicals industry, notably in China. By contrast, oil demand in advanced
economies is expected to continue its decades-long decline, falling from close
to 46 million barrels per day in 2023 to less than 43 million barrels per day
by 2030.”
About three
quarters of supply growth is expected to be provided by non-OPEC-plus producers,
especially in the U.S. and other places in the Americas such as Canada, and
also offshore Guyana, Brazil, and Argentina. Refining capacity is also expected
to grow, again led by Asia, at about the same rate as global production. The
U.S. is expected to supply nearly two-thirds of global oil production growth.
One interesting analysis from the full report: ‘Oil 2024: Analysis and Forecast to 2030’ is the observation that U.S. natural gas liquids (NGLs), particularly propane/LPG and ethane, are being bought by China at increasing levels as the following quote and graph shows. Ethane demand is expected to grow till at least 2030 while LPG/propane growth is expected to taper off and plateau in 2030. The report suggests that oil demand will peak in 2030 and then begin to decline. I predicted a peak by 2035 but we will see how things play out. So the answer to the question, 'Will it happen?' is simply maybe. In any case, demand will peak around 2030-2035. It could be sooner or it could be later but should be within that period.
Chinese capacity and US NGLs reshaping global markets
“Chinese petrochemical feedstocks have provided the single most important contribution to world oil demand growth in recent years, dovetailing neatly with one of the largest driver of incremental global supply: US NGLs. Together these countries have formed a mutually reinforcing symbiosis, with the wave of cheap propane and ethane exports from the United States finding an indispensable outlet and keeping input costs for Chinese importers low. This has transformed oil and petrochemical market dynamics.”
Expected Chinese demand growth by product is shown below:
Global supply
capacity is expected to increase by about 6 million barrels per day by 2030, eclipsing
the forecast demand growth of 3.2 million barrels per day. If that happens
there will indeed be a surplus. If Trump becomes president again (I sure hope
not) he plans to do everything he can to ramp up U.S. oil production. That would
lend likelihood to a surplus scenario. Of course, it would also likely mean
more production for less profit for American producers since it would likely lower
American crude prices. By 2030 there may well be more talk of declining U.S.
shale reserves, especially the ‘core of the core’ areas with the best
production. That means drilling more wells, but it also means drilling less
productive wells. OPEC-plus production is expected to fall a small amount to
2030. The IEA report addresses decline, especially in shale or light tight oil
(LTO) reservoirs as well:
“Due to the natural decline rate of oil and gas
production from conventional and tight reservoirs, close to 5 mb/d of supply
needs to be replaced annually to hold production flat. This rate of decline is
after capex and opex spend and represents a global average of close to 5%.”
The report also
notes that the number of U.S. drilled but uncompleted wells (DUCs) has fallen
to a decade low. Thus, drilling will have to be ramped up to meet demand as
needed rather than just turning already completed wells online.
The U.S.
produces light sweet crude, which requires less sophisticated refineries that
do not require hydrotreating and other processes required for the sour heavy
crude produced by OPEC countries and Canada’s oil sands. Indeed, Canada’s heavy
crude is a major supplier of crude for U.S. refineries. We can also get heavy crude
from Venezuela (not likely due to sanctions), Columbia, and Ecuador. Brazil,
Guyana, and Argentina produce mostly light crudes. Unfortunately for us, our refineries
are outfitted to process heavy crude and so much of our own light sweet crude
is exported for refining in other countries. The costs and regulatory hurdles
to building new refineries in the U.S. are too high to see any new refineries except
small refineries to process light sweet crude.
Iraq and the
UAE are expected to lead OPEC-plus production growth while other countries like
Nigeria and Algeria are expected to have lower production by 2030. The loss there
is expected to be a result of both decline and aging infrastructure. Saudi
Arabia is expected to increase production by a small amount. Russia and Iran are
expected to continue to be hampered by sanctions. Mexican production continues
to decrease. Venezuelan production has stabilized but is not expected to
increase.
In non-OPEC
countries Canada's oil sands are expected to have some growth by 2030. Brazil,
Guyana, Argentina, and Namibia are expected to grow production. North Sea oil,
mostly from Norway is expected to continue its modest decline as Europe
continues to pursue renewables and other alternatives.
EV rollout,
especially in the travel-heavy U.S. has been muted and ripe with difficulties
including lack of access to chargers, chargers that don’t work, and the realization
that driving range drops significantly in cold weather. People who own EVs may
also own gas-powered vehicles and may not use their EVs as much a they had
hoped, especially for long trips. Trump also hopes to roll back Biden’s EV push.
I do not think mandates are a good idea. While the goal is to speed up the energy
transition, mandates often have negative effects, particularly on cost for
consumers. The U.S. auto industry is investing heavily in EVs but must also keep
up with ICE vehicle demand.
The IEA notes
that they think gasoline especially will be oversupplied in the years to come
to 2030. This is due to EV adoption and the use of more biofuels. I just hope
it makes gasoline more affordable for those of us who can’t afford an EV. I do
have an old hybrid that helps me save at the pump, so I guess I’m lucky there.
References:
Slowing demand
growth and surging supply put global oil markets on course for major surplus
this decade. International Energy Agency. June 12, 2024. Slowing
demand growth and surging supply put global oil markets on course for major
surplus this decade - News - IEA
Oil 2024. Analysis
and forecast to 2030. International energy Agency. June 2024. Oil
2024 (iea.blob.core.windows.net)
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