Global oil demand will take another two years to return to pre-pandemic levels, but gasoline demand may have already surpassed its peak, according to a new report from the International Energy Agency (IEA).
At the same time, absent new policies to transition away from oil, crude demand will bounce back and continue to rise for at least another half-decade. “A much stronger pivot towards a cleaner energy future will be required to reach ambitious mid-century goals for net-zero emissions,” the IEA said.
Oil peak still not here
The IEA weighed in on the peak demand debate in its Oil 2021 report, a medium-term outlook on the global oil market with projections through 2026. On whether the world has already passed the peak in demand, as some analysts and even some oil companies believe, the agency split the difference, calling a peak in gasoline demand but suggesting that a peak in crude oil consumption still lies some way off.
In fact, global crude demand reaches pre-pandemic levels by 2023, and continues to rise, reaching 104 million barrels per day (Mb/d) by 2026, up 4.4 Mb/d from 2019 levels. That is still below the pre-pandemic trajectory – prior to the pandemic, the agency saw the world hitting that 104-Mb/d level three years earlier.
All of the increase would come from emerging economies with rising populations and incomes. OECD oil demand never returns to pre-pandemic levels, the agency predicts.
Petrochemicals remain “a pillar of growth” over the next five years.
Petrochemicals remain “a pillar of growth” over the next five years, with ethane, LPG and naptha accounting for 70 percent of the projected increase in oil demand through 2026. This can mostly be chalked up to rising plastic consumption. There is some movement to enact bans on single-use plastic, but the IEA says they are insufficient thus far. In an alternative scenario, the agency says that petrochemical demand growth could be slashed by a third if governments enact more stringent bans on plastic and also boosting recycling rates from 16 to 28 percent.
At the same time, the pandemic will leave lasting scars. Crude demand rebounds, but gasoline demand is “unlikely” to ever return to pre-pandemic levels. “Rapid changes in behaviour from the pandemic and a stronger drive by governments towards a low-carbon future have caused a dramatic downward shift in expectations for oil demand over the next six years,” the IEA said.
The rapid rise of electric vehicles in rich countries could offset growth in consumption in non-OECD countries, putting an end to the growth of gasoline demand. The world will see around 60 million EVs on roads in 2026, a sharp increase from 7.2 million as of 2019. That remains small relative to the global vehicle stock, but it is enough to offset growth in gasoline demand from emerging economies.
Oil bulls point to the shortfall in upstream investment as a reason to believe that another supply crunch looms just around the corner. This theory posits that demand rebounds but supply does not, thereby straining supplies and leading to a spike in prices.
In 2020, global upstream oil investment collapsed by 30 percent.
In 2020, global upstream oil investment collapsed by 30 percent, and it will only rebound “marginally” this year, despite higher prices. The decrease in investment will translate into 5 Mb/d of oil supply that does not come online by 2026. Against that backdrop, the IEA lends credence to the supply crunch theory. “In the absence of stronger policy action, global oil production would need to rise 10.2 mb/d by 2026 to meet the expected rebound in demand,” the agency said.
To be sure, roughly 9 Mb/d of oil production capacity was moved to the sidelines amid the market collapse last year, offering an enormous supply cushion for the next several years. Still, the IEA says that unless governments put policies in place to chip away at demand, spare capacity could erode down to 2.4 Mb/d by 2026, which would be the lowest level since 2016 should it occur.
More action needed
The world remains badly off track in regards to climate targets. Oil and gas production needs to decline by roughly 6 percent per year through 2030 if the world is to stay on track with a 1.5-C warming target, according to a recent UN report. Instead, countries are on track to increase production at a rate of 2 percent per year.
The IEA said that a more aggressive push on fuel efficiency, teleworking, the proliferation of EVs, plastic bans and recycling could shave off 5.6 Mb/d of crude demand by 2026, which would ultimately mean that the world does not return to pre-pandemic consumption patterns.
“Achieving an orderly transition away from oil is essential to meet climate goals but it will require major policy changes from governments as well as accelerated behavioural changes. Without that, global oil demand is set to increase every year between now and 2026,” the IEA’s Fatih Birol said.
In order to meet 2050 net-zero targets, oil demand “must be cut now,” the IEA warned.