No peak oil demand until 2040

A peak in global oil demand is unlikely to occur before 2040 in a sub-$70 oil world, according to a research report from Bank of America Merrill Lynch (BoAML).

Over the medium-term, low oil prices will influence the trajectory of demand growth in three key ways, the report entitled “Global Energy Weekly: Oil is back to the future” explained:

1 They will stimulate demand for vehicle transportation, eg, by boosting car proliferation in EMs;

2 They will slow efficiency gains, as consumers switch to larger and less fuel efficient vehicles; and

3 They will slow the rate of substitution out of oil into alternative (non-oil consuming) vehicles. True, demand has already peaked in developed markets due to efficiency gains. But EM demand is still growing strongly due to rising incomes and urbanization.

Income inequality has been a major political topic around the world in the past decade. Now the massive drop in oil prices from $115 in mid-2014 to $30 per barrel (/bbl), if sustained, will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history.

This figure equates to an average net transfer of $400 per capita to the global consumer, likely having a long-term positive effect on global growth. Naturally, the price drop will have long-lasting effects on petroleum demand too. Oil is predominately a transport fuel, with 55 per cent of global oil demand consumed in transport, with most of it used in roads.

Low prices will boost global oil demand growth to 2020

Conservatively, we see global oil demand averaging 1.2 million barrels per day (b/d) growth per year from 2016 to 2020, boosted by lower prices. This represents a significant increase in demand growth from 1.0 million b/d per year during 2011-14 when oil prices averaged $108/bbl.

Brent dropped 46 per cent year-on-year (YoY) in 2015, and global demand responded by growing 1.7 million b/d, the second highest pace in a decade.

“Two thirds of this demand growth was a price response, on our estimates, the strongest single-year price response ever,” said the global research team at BoAML.

The price effect on demand is strongest in the first year after a price drop on higher miles driven. Yet the cumulative effect over the medium term to 2020 is even stronger, due to increased car ownership in EMs and larger and less fuel efficient car sales in DMs.

Alternatives and climate action: limited impact before 2020

“Alternative vehicles (AVs) pose a small threat to global oil demand over the next five years, in our view. We see AVs, including electric and natural gas vehicles, as a niche that comprises less than 2 per cent of global car sales by 2020. The higher costs of AVs and lack of refuelling infrastructure are even harder for consumers to stomach in a world of low oil prices,” the report said.

Climate action is also unlikely to have a material impact on oil demand over the medium term, as cutting coal in power generation is the cheapest way of reducing CO2 emissions.

If, however, countries around the world were to turn much more aggressive on reducing CO2 emissions, stricter fuel efficiency standards and taxes could reduce oil demand from 1.2 million b/d to just 0.4 per year on average to 2020, according to the report.

Trade Arabia