Analysis

Oil will be a major ingredient in the global energy mix by 2040

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The launch of the 2017 World Oil Outlook (WOO) [1] was held at the Organisation of Petroleum Exporting Countries (OPEC), in Vienna. WOO is an annual flagship publication of OPEC which forecasts important dimensions in the oil industry. It analyses the impact of major pillars that play a key role in the future of the oil industry including global economic growth (GDP), population, energy demand, OPEC-Non-OPEC Oil supplies; Refining Capacity; and Global Oil Exports. This includes analysing the impact of major technologies affecting the oil demand including Electric Vehicles (EVs), enhanced fuel efficiency and shale oil fracking.

Population and Economic Growth:

This year outlook assumes that the world population will increase by 1.8 billion people to reach 9.2 billion in 2040 with most of the growth taking place in India. This leads to estimating a global GDP growth at 3.5% p.a which reaches 126% of the GDP in 2016. Most of the economic growth is driven by developing countries compared with the OECD countries.

Energy Demand:

Global energy demand is projected to increase by 35% with the fastest growth taking place in the renewables. Nonetheless, fossil fuels will continue to supply 75% of global energy demand by 2040 with no less than 52% from oil and gas only. There seems to be a marginal reductions in the demand for oil driven by many external factors such growth in alternative fuels, electric mobility, and environmental regulations of the International Maritime Organisation (IMO). Most of oil demand will be in the transport sector; road and aviation in the developing countries which is expected to exceed 12 mb/d with a decrease in the demand in OECD countries by (7.1 mb/d) due to alternative fuels, EVs, efficiency enhancement leading to a net demand increase of 5.2 mb/d for oil globally in the transport sector.

The number of cars is expected to double mainly in the developing countries from 1 billion to 2 billion by 2040 due to increased population, and urbanisation, and construction of Mega-Cities. EVs is expected to account for 12% of the total road transport vehicles by the year 2040. Demand for oil in the transport sector is expected to decline in the OECD countries by 7.1 mb/d and it will increase by +12 mb/d in the developing countries. The decrease in oil demand in the OECD countries is driven by penetration of EVs and enhancement in fuel consumption efficiency. Demand for OPEC crude remains flat until 2019 after which it gradually increases. There has been no peak demand for oil in the period until 2040.

The IMO regulations will have impact on fuel oil demand leading to additional refining requirements of fuel oil while generating excess high sulphur fuel oil (HSFO). Fuel oil is major constituent of crude oil obtained as a heavy component from crude oil distillation and it is used mainly in marine transport as well as in power generation. The HSFO obtained from refineries will be used for the power generation in order to cope with stringent IMO sulphur regulations in the marine transport.

Oil Supplies and Trade:

WOO shows that there is an expected growth in the Non-OPEC oil supplies to reach 62 mb/d in 2022 and that takes place mainly in the US shale oil. However, this production will peak in 2025 and it then decreases marginally on the long-run to reach 60.4 mb/d by 2040 which leads to an increase in the OPEC supplies to reach 41.4 mb/d. The largest production of shale oil is situated the mainly in the US and Canada, followed by Argentina, and Russia.

Global oil exports are expected to reach 44 mb/d in 2040 increasing by 6.5 mb/d starting in the US and Canada which will account for 70% by 2025, then the Middle East will increase after 2025. The increase in oil exports in the US and Canada is driven mainly by the increase in shale oil production which peaks in 2025 after which demand for OPEC crude, exported mainly from the Middle East, will increase.

Refining Capacity:

The increase in oil production requires investments in the upstream, mid-stream and down-stream sectors. This also leads to increased refining requirements to produce various fuels to meet the required energy demand. The global refining capacity is expected to reach 19.6 mb/d in 2040 with 70% of global expansion capacity will be in China, Asia-Pacific and the Middle East. Investments required by the oil sector will reach USD10.5 trillion by 2040 of which 80% will be in the upstream sector.

Major Assumptions and Uncertainty:

WOO assumes an evolutionary development in technology and energy policy; increasing energy efficiency while reducing emissions. The forecast reported by WOO is subject to uncertainty in four key factors; GDP growth, EVs penetration rate, the level of implementation of energy efficiency measures, and the growth in the supply of US shale oil. Demand for oil in 2040 reference case is 111.1 mb/d of which at least 34% will come from OPEC. A faster penetration of EVs by 60% of new car sales would lead to a reduction in oil demand by 2.5 mb/d by 2040. In addition, the implementation of more aggressive energy efficiency measures in the developing countries leads to more reduction in the demand for oil which decreases by 3.5 mb/d to 107.9 mb/d in 2040. A higher GDP growth (3.6% p.a) showed a total increase for oil demand to 113.8 mb/d while a lower GDP growth (3.3% p.a) led to a total growth in oil demand to 107.5 mb/d.

The work reported by WOO shows that oil will continue to be a key player in the global economy in the next decades. The theory of peak demand for oil is not observed in the forecast period reported despite assuming an increase the penetration rate of EVs and energy efficiency, and fast growth in renewables.

References;

OPEC (2017), World Oil Outlook 2040, Organisation for Petroleum Exporting Countries (OPEC), Available online: https://woo.opec.org [access date 07/11/2017]

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