A New Reality For Oil?

The reality of the fundamental economic shift accelerated by COVID-19 is hitting the oil market, with reports from BP that we may already...

The reality of the fundamental economic shift accelerated by COVID-19 is hitting the oil market, with reports from BP that we may already have passed the point of peak oil.

Only a year ago, BP was assuming that oil demand would grow at least until the 2030’s. Now, with BP’s 2020 Energy Outlook (the annual report considered market leading analysis by many), the company is warning that oil demand may never outstrip the 100 million barrels a day consumed in 2019.

The report focused on a selection of scenarios, Rapid, Net Zero, and Business as Usual to describe what might happen in the global energy markets over the next three decades and basically suggests that the era of oil demand growth is over. At its most enthusiastic, the Outlook sees little growth in demand and other scenarios suggest a fall in demand by 50-80 per cent by 2050. It predicts that energy consumption will shift away from fossil fuels, and renewables grow rapidly as the ‎world continues to electrify. ‎

BP is not alone.  In the last week alone the IEA’s latest Oil Market report reduced its global oil demand forecasts for this year by 200,000 barrels per day, its first downgrade in some months as global supplies continue to grow. While unquestionably the resurgence of COVID-19 cases is having an impact, the report showed how delicate the situation is today. OPEC also lowered its projections for 2020 demand by 400,000 barrels per day. While these might be shorter term predictions, they suggest that the market is facing some serious challenges.

Some oil analysts argue that any prediction that peak oil has been reached is a fundamental misunderstanding of the markets. The chief executive of the Vitol Group for example, has been reported saying he expects to see at least another decade of growing oil demand. The argument is that the current collapse in the oil markets is due to the reduction in demand driven by COVID-19 related impacts and that as the world recovers, so will oil demand.  Its argued that the oil sector was already oversupplied prior to the pandemic and that played a significant role in depressing demand but that too will pass. They argue that growing energy demand in emerging markets such as China, India and Africa will continue and contribute significantly to growth in oil demand and the sector overall.

A lot depends on the choices made by policy makers in different markets. The concern is the extent to which politicians stand by their promises of green recovery, and how far asset managers will demand change in order to ameliorate climate risk. ?  It is important to understand how internationally listed oil companies might respond differently to investor and market concerns than state-owned oil companies. An IOC and a state-owned company report to different concerns – yet BP’s perspective is a bellwether and it would be remiss to ignore its shift in position.

It can be difficult to decide whether the pro or anti oil experts are right when the situation consists of multiple volatile and even unknowns factors. One important factor however is going to be how economic recovery is managed, as is the importance of the energy market transformation that was accelerating pre-pandemic. Questions must be asked as to whether future energy demand growth will mean demand for oil, or will increasing electrification rely on alternative sources; will the supply chain remain as dependent on the fossil fuel sector as it has been for years?

Part of the challenge is the shift in the way that we understand the term ‘peak oil’. Used initially by Shell geologist Robert Hubbard in the fifties, it was a theory that at some point we would reach a peak in the supply of oil and that thereafter the cost of extraction would increase, having a negative economic impact. This theory has been disproved over time, with improvements in technology and new oil finds more than keeping pace with demand.

The historical approach was that if you want to increase demand for oil, just cut the price. In today’s world, where solar power is already the cheapest form of electricity generation in many markets, it’s not clear that this still holds true. The energy matrix is far more complex than it was even a couple of decades ago.  The question that dominates the debate today is just who is demanding oil these days?

Over the last few years the oil industry has accepted that demand is likely to fall in the transportation sector, especially as electrification of vehicles continues to increase. The expectation however was that any fall in demand from transportation would be replaced by the petrochemical sector. That assumption has been seriously challenged by a growing global movement to find alternatives to plastics, as their use of fossil fuel and likelihood of ending up in the water chain (indeed, in our seas) has seen growing consumer backlash.

Other sectors are following suit. Unilever, which has continued to lead from the front on sustainability terms, has announced its own plans to achieve net zero emissions from its products by 2039. It recently said it would be investing 1 billion in its Clean Future initiative, which will help the business achieve its goal. As part of that it plans to eliminate fossil fuels in its cleaning products by 2030, replacing 100% of the carbon derived from fossil fuels in its cleaning and laundry product formulations with renewable or recycled carbon. While this is the first of such initiatives, where Unilever leads, many consumer facing companies tend to follow.  

Unilever has developed what it calls it’s ‘Carbon Rainbow’ model. This approach will see the business turn away from fossil-fuel sources of carbon (black carbon) to captured CO2 (purple carbon), plants and biological sources (green carbon), marine sources such as algae (blue carbon), and carbon recovered from waste materials (grey carbon). Transparency in just how materials are created is a hugely important step in changing that process.

It’s not just consumer facing businesses that are transforming however. Interest in the circular economy, where products are designed to be brought back into the supply chain at the end of life, is growing rapidly across multiple sectors. This has a direct impact on emissions – the Ellen MacArthur Foundation estimates that 45 per cent of carbon emissions could be addressed in the supply chain. It also massively decreases waste and its associated environmental and economic impact through the incorporation of three key principles; design out waste and pollution, keep products and materials in use and regenerate natural capital.

When you consider that Accenture

predicted potential for $4.5 trillion of new economic growth to 2030 through the use of circular economy strategies powered by digital, it’s no wonder that the market is interested. Companies like enterprise software company SAP

may not seem a natural bedfellow for the environmental movement but with 77 per cent of the world’s transaction revenue touching an SAP system, their impact and engagement could help transform supply chains. So when, in early 2020, SAP announced they had joined the Ellen MacArthur Foundation’s Circular Economy 100 Network, it’s a clear signal that the approach is moving mainstream.

What matters here is that the oil market is not seen in isolation as an energy market. It touches on elements of the economy at every level and in many different ways. What analysts need to understand is that the economy is going through a seismic transformation, as global industries struggles to manage issues of social justice, environmental impact, climate risk, digitization, pandemics and more.

What is clear is that business as usual is no longer an acceptable pathway or a sufficient response to change. Innovation, empathy and a sense of social responsibility are going to be necessary for long term success, as well as an understanding of just how interconnected all the economic and social choices we make actually are. As companies increasingly seem to be accepting of this, the future may be fossil free sooner than expected.

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Newsrust: A New Reality For Oil?
A New Reality For Oil?
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