Collapsing global oil demand? Don’t bet on it.
Media outlets proclaimed the impending collapse last week, based on a report by U.K.-based natural resources consultancy Wood Mackenzie that uses flawed assumptions about the pace of decarbonizing energy markets.
While Wood Mackenzie emphasizes that its report “is a scenario, and not our base-case forecast,” and “one interpretation” of how the world could achieve net zero greenhouse gas emissions, it nevertheless paints a misleading picture about the road ahead.
COVID has shown the scale of our reliance on oil
The COVID-19 pandemic has shown the scale of how integral oil is to power the world, and how unlikely it is that major declines in oil demand are on the way anytime soon.
Wood Mackenzie’s scenario projects that oil demand, which is now almost 100 million barrels per day, will start declining in 2023 and drop to about 35 million barrels per day in 2050.
At the height of pandemic lockdowns in April 2020, approximately one-third of the world’s vehicles were off the road and up to 95 per cent of airplanes out of the sky, estimates Jackie Forrest, executive director of the ARC Energy Research Institute. At that height of the immobilization, global oil demand dropped by just 20 per cent.
“It is shocking, because I think a lot of people didn’t realize that light-duty vehicles are not the only thing that consumes oil. We still continued to want to eat and move goods around, and a lot of shipping still happened,” Forrest said in a February ARC Energy Ideas podcast. “That level of lockdown didn’t reduce oil demand maybe as much as people thought.”
In addition to transportation fuel, oil is used to make countless plastic and synthetic products – everything from clothing, computers, cell phones, car components and furniture, to medical equipment, plexiglass, hand sanitizer, carpets, toys, and beauty products.
“In 2020 we saw oil demand fall by 10 million barrels per day, but as you will see, 2021 forecasts show a rebound in demand of about 5 to 6 million barrels per day,” said Joseph McMonigle, secretary general of the International Energy Forum, during a February joint virtual session with OPEC and the International Energy Agency.
“Certainly the impact to demand was profound and unprecedented, the biggest demand shock in history, but it is important to note that 90 per cent of demand remained intact, demonstrating oil’s resiliency and necessity to fuel the world economy.”
Wood Mackenzie scenario goes beyond International Energy Agency projections
Wood Mackenzie’s scenario goes even further than the International Energy Agency (IEA)’s most aggressive decarbonization scenario, which the IEA says the world is not on track to meet.
Under the IEA’s Sustainable Development Scenario, which aligns with the goals of the Paris climate agreement, global oil demand declines to 66 million barrels per day in 2040. But as the IEA notes, the SDS scenario is not the one that is playing out.
What is playing out is what the IEA calls its Stated Policies Scenario, which is expected to see global oil demand increase to 104 million barrels per day in 2040, driven by population growth and emerging economies in India and Asia.
Emerging economies want cheap, reliable energy
According to United Nations forecasts, the world’s population is expected to grow by 2 billion people by 2050, reaching 9.7 billion, driven primarily by growth in India.
“You have 800 million people who don’t have access to electricity… You can’t say that they have to go to net zero. No, sorry, they have the right to develop…they want to build skyscrapers and have a higher standard of living, and you can’t stop it,” he said.
ATB Capital Markets says that while net zero is an important goal collectively, some emerging economies may have different priorities.
“For North America and much of Europe, focus in the last decade has been to curb the consumption of oil. For India and China, however, the focus has been on raising the quality of life for its people,” analysts said in a research note last week.
Natural gas critical in all scenarios
In the Wood Mackenzie scenario, demand for natural gas “remains resilient” over the coming decades as Asia’s developing markets replace coal with natural gas for power generation. This is similar to the IEA’s Sustainable Development Scenario, where natural gas demand decreases to 344 billion cubic feet per day in 2040, from about 390 billion cubic feet per day in 2019.
But in the more likely Stated Policies Scenario, global natural gas demand is expected to continue increasing, to 505 billion cubic feet per day in 2040.
Replacing coal with natural gas-fired power is a key long-term opportunity for Canada. Just one project, LNG Canada, is expected to reduce GHG emissions in China by the equivalent amount of shutting down 20 to 40 coal-fired plants.