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Analysts See Oil Industry’s Twilight, But Not Soon Enough to Hit Climate Targets

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Two different analyst reports this week show the oil industry moving into its twilight, but the projected rate of decline is still far too slow to hit a 1.5°C threshold for average global warming and hold off the worst effects of climate change.

The annual modelling report by McKinsey Energy Insights and a review by UK investment fund manager Nick Stansbury both deliver news that would surely come as a shock to anyone who’s bought fossils’ overheated assurances [1] that demand will keep growing through 2040 or beyond. But the pace of change still falls short of the stark warning in the October, 2018 report of the Intergovernmental Panel on Climate Change (IPCC), which set an achievable [2] but immutable 2030 deadline to reduce global greenhouse gas emissions by 45%.

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McKinsey acknowledges as much, projecting that emissions won’t peak until 2024 and will only fall 22% by 2050 in its base scenario. “This downward trajectory, however, is still far off from a 2.0°C pathway,” the global consultancy notes.

McKinsey’s Global Energy Perspective 2019 Reference Case [4], released Tuesday, sees global oil demand peaking in 2033—four years earlier than last year’s prediction—at 108 million barrels per day, Rigzone reports [5]. Between 2020 and 2030, demand growth will slow to 0.7% per year, compared to more than 1% over the last three decades, with petrochemicals accounting for more than half of the new growth. McKinsey sees demand falling 0.2% per year in the 2030s and 0.6% per year in the 2040s.

“The chemicals sector is the main driver of oil demand growth but is expected to slow down after 2030, driven by slower plastics demand growth and increased plastic recycling,” the report states. “Global annual electric vehicle sales are expected to exceed 100 million by 2035, triggering a decline in oil demand for road transport.”

The analysis shows electric car sales growing 60-fold between 2018 and 2050, with more than two billion EVs on the roads by mid-century and annual sales of more than 100 million by 2035. But natural gas demand doesn’t peak until 2038, and barely drops through 2050. “China’s demand growth is greater than that of the next 10 largest growth countries, including the U.S., and represents nearly half of demand growth through 2035.”

The review by Nick Stansbury, head of commodities research for the US$1.3-trillion Legal & General Investment Management Ltd., suggests that “the global oil industry’s foundation of ever-expanding demand will probably crumble, and that may hurt profits sooner than expected,” Bloomberg reports [6]. Particularly because the latest demand slump will be different from anything the industry has ever experienced before.

“In the past, oil price slumps have stimulated demand increases, as consumers have taken advantage of lower costs. Meanwhile, longer-term growth in the global economy and population rises have continued to push crude consumption higher,” Bloomberg explains.

But now, “the sector could lose its ability to recover from price slumps entirely as global oil demand peaks, which is expected in the 2030s, and it could even be sooner than that,” the news agency notes. “The fact that the industry may face much lower growth rates soon is something management needs to address now, because the slower pace of rising demand may not be enough to spur crude prices that justify projects with decade-long investment cycles.”

“What matters is when the demand hits a plateau, not the absolute peak year,” Stansbury said. “It’s really hard to argue it’s not a near-term problem.”

Within the next 10 years, Bloomberg adds, Stansbury believes companies should begin to “prioritize returning cash to investors rather than overspending on new oil and gas projects, or trying to develop renewable energy businesses.” Electrification of the global energy system will force fossils to “begin competing with each other to supply a decreasing pool of customers amid potentially low prices,” while the challenge of climate change becomes a “key focus for fund managers”. Already, investment firms with a combined $32 trillion under management, including Legal & General, have joined the Climate Action 100+ program, and they’re “seeking to push executives to gradually replace the world’s energy system without hurting the pace of economic growth.”

“We don’t want them to stop all investments today because it’s too early, and the risk is that you under-invest in the energy system,” Stansbury said. “But the winning companies will be those whose management teams understand the risks and get ready to put their businesses into that very slow, gradual, run-off mode.”

McKinsey also projects an “accelerated transition [7]” scenario in which oil demand peaks before 2025, coal demand decreases rapidly, natural gas grows to 23% of global energy supply by 2050, and emissions fall by 1.1% per year. It identifies eight shifts that could “further accelerate the energy transition”: Faster uptake of electric vehicles; improved efficiency and use of low-emission fuels in aviation and marine transport; faster electrification of home heating; faster electrification of cooking in Africa and Asia; faster demand reduction and recycling of plastics; greater efficiency, recycling, and low-emission feedstocks in iron and steel production; greater electrification of low- and medium-temperature heat production in EU industry; and faster cost reductions for renewable energy and energy storage.

“Although these eight shifts may not represent the most probable future,” McKinsey states, “they should be considered conceivable based on the developments that can be observed today.”

The McKinsey results contrast with the latest long-term outlook from industry analysts Rystad Energy, which shows oil demand growing steadily in the 2020s and peaking in the late 2030s, Rigzone notes.