What BP Got Wrong About Global Oil Demand

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By Cyril Widdershoven

Environmentalists around the world are having a field day this week as international media picks up on the oil market forecasts in the recently released BP Energy Outlook 2020. It appears the old theory of Peak Oil is back in the spotlight, with BP indicating that oil demand may never return to 2019 levels. Just as BP’s report was being digested, OPEC released a report cutting its global oil demand forecast by 400,000 bpd for 2020, predicting an average demand drop of 9.5 million bpd compared to its previous estimate of 9.1 million bpd. It predicted demand to grow by 6.6 million bpd in 2021, which was also 400,000 bpd lower than its previous estimate. The oil cartel blames COVID-19 related economic issues for the downward revision. While OPEC’s report did impact oil prices, it was the BP Energy Outlook 2020 that made bigger waves. Both suggest that the U.S. will face significant constraints in bringing oil demand back online but are slightly more optimistic about European and Chinese Demand. OECD oil demand is expected to slowly recover, but demand from the aviation industry is unlikely to bounce back anytime soon.

Its most recent report is not the first time that British oil major BP has made news in recent months with its push for a greener future. But its energy outlook assessment is probably the most shocking yet. The report indicated that if governments grow more aggressive in their attempts at reducing carbon emissions, demand may never recover from its current slump. It also stated that oil demand is likely to dramatically fall in the next 30 years, mainly due to the growth of renewable energy.

While the picture the report paints of the oil industry in terminal decline has grabbed headlines, there are several reasons that its projections should be viewed with skepticism.

The first reason is that, at present, the demand destruction we are witnessing has been driven by COVID-19, a Black Swan event that will – at some point – subside. In the meantime, many seem to forget that the demand picture was gloomy even before COVID came along, with too much oil on the markets and in storage. Eventually, IOCs and OPEC will have to act to counter this oversupply, and when they do, demand will react positively.

The second reason to be skeptical of this report is an economic one. Demand for energy and electricity is growing, not in OECD countries but outside, mainly in India, China, MENA, and Africa. These fundamentals are unavoidable. The economic and trade disruptions caused by COVID could even boost oil and gas demand, as a possible redistribution of regional production centers from the current China focus could increase the energy demand for transportation.

Thirdly, the media and analysts need to start dividing their oil and gas assessments between the two main blocks, IOCs (Shell, Chevron, BP, Exxon, ENI, and Total) and NOCs (Aramco, ADNOC, Gazprom, etc.). The future of IOCs could be as BP paints it, because financial markets and investors are becoming increasingly conscious of the environment. There is a chance that IOCs face peak oil (and gas) production if activist shareholders and media/government pressure force them to become green. Lower investments combined with lower revenues, margins, and dividends, will be the major threat. NOCs and possibly independents such as Petrofac, however, could be looking at a bright and prosperous future. Even if the demand for oil and gas someday does peak, the call on NOC oil will increase. Lower production of IOCs will be shifting demand to NOCs and new incumbents.

Still, if there is, as indicated by BP and media analysts, the threat of a peak oil demand scenario in the coming years, it is the IOCs that will bleed. The lack of proactive strategies and the overestimation of their own power has become clear, even if it has yet to be recognized by London, The Hague, and some other places. The integrated oils of the past will be removed or substituted by the New Seven Brothers of the Future. Their margins and financial powers are different, making Peak Oil scenarios unlikely in the next 10-15 years.

Crude Oil

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