Despite its Reference Case accounting for expectations that policies will improve energy efficiency, OPEC’s WOO suggests that oil demand, particularly from transportation, will remain on a healthy growth trajectory through 2040.
OPEC’s World Oil Outlook (WOO) 2015, released today, charts a vision of the oil market for the next two and a half decades, making explicit reference to the potential of “broad impacts” from efforts to increase efficiency and lower emissions in the wake of the COP21 agreement struck in Paris earlier this month. Yet, despite its Reference Case accounting for expectations that policies will improve energy efficiency, the WOO suggests that oil demand, particularly from transportation, will remain on a healthy growth trajectory through 2040. Not only does OPEC’s projections exceed 2040 total liquid demand estimates in the reference scenario of the IEA’s World Energy Outlook (WEO), released in November, by 1.9 mbd, but if biofuels are excluded, the difference is even higher at 2.4 mbd. The divergence between the outlooks highlight the importance of long-term trends in vehicle efficiency and alternative fuel vehicle (AFV) adoption in global oil demand trajectories.
Ostensibly, the two reports use fairly similar methodologies for their reference cases. Like the WEO’s central New Policies Scenario, OPEC’s new outlook incorporates expected national energy policies from stemming from Intended Nationally Determined Contributions pledged in advance of COP21. Similarly, assumptions about GDP growth rate are not significantly different across the two studies. Both assume an average global economic growth rate of 3.5 percent through 2040, with only miniscule differences in expected growth in OECD and developing countries.
The main takeaway from both reports: Demand for oil will continue to rise in for the longer term even with improvements alternative vehicle technology and fuel efficiency gains.
Even under the New Policies Scenario, the IEA’s projections for real prices appear to be higher than in OPEC’s reference case. It is impossible to do an exact comparison, as OPEC’s assumptions are denoted in terms of the OPEC Basket Price, a weighted average of OPEC streams. As they tend to be heavier than other streams, Brent is currently at a roughly 20 percent premium to this price. However, with OPEC projecting real prices of $95 in 2040, even adding a similar premium would not approach the IEA New Policies price assumption of $128. Whatever the case is for the difference in projections, both see oil markets tightening over time and a higher price level for consumers.
OPEC’s market share to gradually rise
OPEC’s projections show the organization reaching 46 percent market share by 2040, versus 39 percent last year.
While the OPEC scenario is rosier for oil producers in general, it is not disproportionately optimistic for OPEC itself. Nonetheless, its projections show the organization reaching 46 percent market share by 2040 (versus 39 percent last year). The IEA makes the same market share estimate. So, in essence, the OPEC World Oil Outlook doesn’t necessarily portray a much richer future for OPEC than the IEA World Energy Outlook does through 2040, as it projects OPEC to have only 1 mbd more production at the end of the period (50.2 mbd versus 49.2 mbd) with a lower assumed price. Both reports are largely in harmony in the short term. In fact, the IEA expects global oil and liquids demand to reach 98.0 mbd in 2020, exceeding OPEC’s projected 97.4 mbd.
OPEC doesn’t see China slowing down
While OPEC agrees with the IEA’s projections for total Indian demand growth between now and 2040, it diverges from the opinion that the deceleration of China’s demand growth in the 2030s will be as drastic.
One main difference, one with repercussions well beyond 2040, is a significantly higher global demand trajectory in the later years of the study period, with growth slowing notably less than the IEA projects after 2020 and particularly after 2030. The IEA sees China’s oil demand growth leveling off after the mid-2020s, due to structural reform and the imposition of vehicle fuel economy standards, with India becoming the driving force in world demand growth thereafter. While OPEC agrees with the IEA’s projections for total Indian demand growth around 6 mbd between now and 2040, it diverges from the opinion that the deceleration of China’s demand growth in the 2030s will be as drastic. The WOO projects that of a total 7.5 mbd in increased demand from China during the next two and a half decades, with 2.4 mbd coming after 2030.
What drives the divergence in opinion about how demand will change in the medium to long term is different beliefs about trends in vehicle choices. The IEA, in summarizing its projected leveling off of oil demand, wrote in November, “Demand increases to around 103 million barrels per day (mb/d) in the 2030s but growth all but stops at this level, as relatively elevated price levels combine with policies and technological change to induce fuel switching away from oil and the adoption of more efficient vehicles.” While OPEC sees plateauing gasoline demand in the 2030s and increased efficiency (with average fuel economy for passenger vehicles worldwide being twice current levels in 2040), diesel demand is projected to grow sufficiently to offset that. Moreover, wide-scale fuel switching is not seen as a realistic development, according to the WOO.
Shift to alternative fuel vehicles to be underwhelming
The continued global increase in oil demand in the WOO is founded on expectations that a shift to AFVs will underwhelm over the next quarter century.
Essentially, the continued global increase in oil demand in the WOO is founded on expectations that a shift to AFVs will underwhelm over the next quarter century. OPEC projects that by 2040, only 6 percent of vehicles worldwide will be non-oil—a minor increase from 2 percent today—with only a negligible share coming from electric vehicles. The report cites frequently mentioned challenges, such as range anxiety and the difficulty to get motorists to change behavior, surrounding consumer acceptance in explaining low EV adoption, but more importantly, it suggests battery costs are only likely to decrease by 30 to 50 percent by 2040. In addition, OPEC projects a 1.6 mbd increase in biofuel production and use by 2040, far less than the 2.7 mbd increase projected by the IEA.
The conclusion from OPEC projections is that the organization is confident in the long-term need for oil, despite talk of peak demand. With an analysis showing such weak inroads by AFVs, it’s not surprising that when asked this month about a potential demand impact of COP21, OPEC’s most visible oil minister, Ali al-Naimi of Saudi Arabia, laughed and replied, “Maybe in 30 years.” Even with the IEA being fairly conservative in its estimates for decreases in oil demand growth, OPEC’s WOO shows that the picture could be even worse for those hoping for higher AFV penetration and lowered oil demand if investment in technology such as EV batteries and advanced biofuels remain low priorities in the United States and worldwide.