Energy cannot be created or destroyed, but can be altered from one state to another (1).
Oil Supply Dwarfs Demand – Official
“There is an abundance of oil: known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond.” Spencer Dale, BP Chief Economist, from BP Energy Outlook, Jan 2017.
Here is a chart from BP in their latest annual Energy Outlook, that confirms as predicted, the oil age will not end due to lack of oil.
A key finding in BP’s Energy Outlook, that is discussed at length, is the fact that whilst proven world oil reserves have been growing at a rate of about 3% pa for the last 30 years, oil demand has slowed to under 1% in the past decade.
These Proven Reserves, technically and economically viable today, have also concentrated into three areas: OPEC, Russia and the US, three of the lowest cost regions for oil extraction and production in the world.
At the same time, oil demand has started to weaken considerably, and tend toward plateau, or even peak.
So, in BP’s straightforward analysis, looking out even beyond 2050, cumulative demand amounts only to half of today’s viably recoverable oil reserves.
Technology investment has done its part in providing enough resources – the industry players now have to figure out how to manage their exits.
We now enter oil’s long end game of managing deteriorating demand, and abundant supply.
Deteriorating Demand – Peak Gasoline
There is a detailed debate in the Outlook regarding transport fuel demand, as this is a key element of future oil consumption. It centres on EV penetration, but in reality it’s the changing global structure of transportation that is more important.
Peak transport oil demand is imminent because the growth areas of oil consumption such as China and India, show very different characteristics to the current OECD transport picture, dominated by US consumption.
The US consumes almost 50% of global gasoline but with just 30% of its cars because it is a major outlier in terms of very high annual travelled miles and low fuel efficiency.
Global VMT per capita Vehicle fuel efficiency
Future growth will therefore be shaped more by the way China, India and the EU use their vehicles.
As other studies have shown, they are likely to drive less, and be more fuel efficient.
BP looks at various downsides for fuel demand due to EVs or the emergence of mobility services such as autonomous vehicles – but the simple maths of the RoW usage patterns dominating future global demand suggest the following demand curve.
dollarsperbbl estimate: Based on following annual projections – Global ICE fleet 900 million, 14,800 VMT per vehicle with -1%, pa decline. fuel efficiency 8.5l/100km and decrease -2.4%, global fleet growth of 2%pa and annual scrappage of 4.5%, EV growth rates leading to 10% total fleet 2030, 20% by 2035 (35% of annual sales).
This indicates fuel peak demand by 2019-20, and the shape of the demand curve is in line with BP’s Electric Revolution scenario, which also includes ride sharing, and autonomous vehicle usage, not considered in detail in the above.
A near-term shallow peak followed by accelerating decline: the key message is obvious – to a good approximation we are at Peak Fuel demand.
A key point to note is that the shallow peak is a brute consequence of more compressed global driving distances and overall fuel efficiency, so-called automobility – and not reliant on EV demand; EV demand does kick in later, and creates the accelerated decline. But the saturated driving patterns cause the current demand squeeze.
To reiterate, whatever the future brings in terms of EVs, autonomous driving and mobility as a service, it certainly will not deliver another 250 million US-style vehicle drivers with high fuel consumption internal combustion engines, and large annual travel distances. That is the core difference, and why peak oil demand draws closer.
In terms of overall transportation, BP also looks to trucks for more consumption, but these are just as susceptible to the efficiency, electrification and travel trends as for cars. In addition, the major growth economies of Asia are moving into consumer-led growth rather than industrial and construction-led growth, reducing energy intensity.
As gasoline and diesel fuel make up around 65% of the total crude oil barrel, this plateau of fuel demand drives the total crude picture suggesting peak demand in imminent, in the 2019-20 timeframe – in contrast to the BP business-as-usual projections that has continued growth for the next two decades, but aligned with their downside scenarios.
The Abundance of Oil
However, in the shadow of BP’s statement about the “abundance of oil”, this milestone of a rapidly approaching peak in oil demand is almost a footnote,
Whether oil peaks now or sits becalmed for a decade, the aggregate demand requirement will fall within a relatively narrow aggregate range of 600-700 billion barrels out to 2035.
Either way, demand is “dwarfed” by the accessible reserves of up to 2.5 trillion barrels we have at our disposal, amounting to 3-4 times the requirement to 2035.
So, lost in the whole debate regarding the precision of when peak oil demand might occur is the oversized fact that after decades of pursuing greater than 100% reserves replacements and production increases at the cost of several trillion dollars, the national and international oil companies, along with newer players in the vast tight oil deposits of the US, have created a massive stockpile of accessible and economic oil resources, the majority of which will likely not be required.
Highlighting this, BP is questioning the industry orthodoxy – a reliance on smooth upward projections of demand, and constrained supply – that has caused most players to pursue these vast investments in exploration, reserves replacement and production.
And this orthodoxy has seen returns on equity shrink to below 2-3%.
The overall result – a massive over-abundance of
BP is now calling this dislocation and suggesting a new set of strategies will be needed.
But for now, the central projections of BP’s Outlook clearly suggest they themselves will continue with the standard model.
So as of today, despite reserves dwarfing demand, the industry continues to add aggressively to the reserves base.