With the collapse in oil prices triggered by coronavirus prompting a historic agreement between Opec+ to cut supply, some of the market’s leading authorities are already peering through the smoke of the blazing demand crater to try to discern the speed of the recovery beyond.
For example, the US Energy Information Administration expects a demand drop of 18m barrels a day at the trough this month before a sharp recovery back to 100m b/d by the end of the year for an annual reduction in global consumption of only 5.2m. It then sees global demand reverting serenely to its previous course, with 2021 consumption projected at 102m b/d, some 7m higher than 2020 and 1 per cent above the 2019 level of 100.8m (until now the all-time record high).
Similarly, while the International Energy Agency now sees a bigger drop both at the trough this month of 29m b/d and for 2020 as a whole of 9.3m, by December it has demand back to only 2.7m below the level at year-end 2019.
But what if some of the current demand destruction turns out to be permanent? Could 2019 even mark the all-time peak in global oil demand, with a plateau between 95m and 100m b/d for a few years before long-term decline kicks in?
If the question sounds deluded, consider the structural pressures on the oil market already in evidence before coronavirus hit and then add to these the behavioural changes prompted by the pandemic, some of which seem likely to stick.
First, take the structural pressure of efficiency improvements, clearly visible in US oil demand over the past decade and a half. According to the EIA, the highest level of US oil demand to date was registered all the way back in 2005 at 20.8m b/d.
Despite the US population growing by 20m people over 2005-19, and vehicle miles travelled (VMT) increasing by nearly 10 per cent from 8.2bn miles a day in 2005 to 9bn miles a day in 2019, US oil consumption in 2019 was still below the 2005 level. The increases in population and VMT were outweighed by greater vehicle efficiency.
Second, the petrol consumption lost to efficiency improvements in the US and elsewhere over the past 15 years will be dwarfed by the petrol demand destroyed globally over the next 15 years by the far superior efficiency of electric vehicles. This is a structural pressure only just starting to assert itself but with China and India competing with Europe for the most ambitious targets on EV penetration, its effect will be both profound and far-reaching.
Third, there is the backlash against globalisation. This was mainly a political phenomenon before the pandemic struck but with the virus having revealed the fragility of over-extended industry supply chains, there is likely to be a debate over the prudent limits of outsourcing once the public health crisis has passed. More locally sourced production would mean less oil demand.
Next, consider the behavioural changes impacting oil demand caused by the pandemic.
First, hundreds of millions of daily commutes have been eliminated under the global lockdown as all but essential workers have adapted to working from home. There will be oceans of academic ink spilled on the productivity impact of this phenomenon when the data starts coming in, but if the question is whether the long-term impact will be higher or lower rates of home working in the future, who would now bet against it being higher?
Second, international air travel has collapsed over the past few weeks as business meetings and conferences have been rendered impossible by the global lockdown. Yet air travel has been one of the fastest growing sources of oil demand over the past decade. Growth will come back but as businesses have learnt to substitute face-to-face meetings with videoconferencing services, who would be willing to bet that it will ever return to the rates seen over the past decade given the cost and efficiency savings reaped by businesses from this change?
Third, even when normality starts to return and lockdowns are gradually lifted, public health considerations may weigh on governments’ willingness to allow large gatherings to restart for some time beyond, while personal health considerations may weigh on people’s willingness to travel to them. The psychological scar this virus leaves on our most social of species may be profound.
In short, what we are seeing may be something more serious than some sand in the wheels of the juggernaut of rising oil demand, easily fixed via a historic supply cut and a V-shaped recovery. Instead, it may be the juggernaut’s engine finally flooding, no longer able to process the volume of liquid being pumped into its cylinders.
Seeing a plateau in global oil consumption sooner than expected is no longer a risk that can be easily ignored for the industry.
Mark Lewis is global head of sustainability research at BNP Paribas Asset Management
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