Has demand for oil already peaked?
The energy transition is accelerating fast. Even oil major BP thinks we may have already reached peak oil demand.
Alternative energy sources to fossil fuels have been around for many years. Countries around the world are now harnessing the power of the wind, sun and tides to cut their dependence on fossil fuels such as oil.
However, this transition to renewable energy is now set to accelerate rapidly, driven by a number of factors. Firstly, climate change can no longer be ignored and the political will (in most countries) is finally there to confront the challenges. Secondly, renewable energy is now as cheap as fossil fuels. And finally, consumers are demanding that this happens, with demand for electric vehicles (EVs), for example, soaring.
And it appears that this view is shared by energy giant BP, which recently said that renewable energy is now growing faster than any other fuel in history and that demand for oil may have already peaked. The company made the declaration in its annual Energy Outlook report which explores how big oil companies might reduce their emissions as concerns grow around the world over their damaging effects on the climate.
In the report, BP considers the three most likely scenarios for the direction of the oil and gas sector for the next 30 years. In the main scenarios it considers, energy demand around the world continues to grow for at least part of the period to 2050, with higher levels of renewable energy offsetting a declining role for fossil fuels together with an expanding role for electricity.
Interestingly, in all three scenarios demand for oil is predicted to be lower over the next 30 years. In its “business as usual” scenario, demand is predicted to be 10% lower by 2050, in its “rapid change” scenario it is predicted to be around 55% lower and in “net zero”, its most aggressive scenario, demand could be 80% lower. In its most benign scenario (“business as usual”), demand plateaus in the early 2020s. However, in the final two scenarios oil demand never fully recovers from the decline caused by Covid-19 disruption.
To assess the impact of this announcement by BP, we spoke to fund manager Mark Lacey, who specialises in the energy transition.
“BP’s claims of peak being reached right now are a little dramatic but given they fit their new strategy of reaching net zero by 2050, we are not surprised”
“Our view of peak oil demand sits somewhere between 2025 and 2030. The exact timing is dependent on how well the global economy recovers from the Covid-19 pandemic, the recovery in air travel use for both business and pleasure, and how fast electric vehicles are adopted. All three of these factors are closely interlinked”.
“But we cannot get away from the fact that the need to reduce carbon emissions remains a crucial driver of the energy transition, and structural shift in investment from the major oil companies is an encouraging step forward. More action will need to be taken if we are to meet the goals set out in the Paris Agreement of limiting the increase in global temperatures to 2 degrees above pre-industrial levels.
“Demand for clean energy technologies is proving to be remarkably robust as consumers seek to limit their carbon footprint. Surging sales of electric vehicles (EVs) are driving the move away from oil and to electricity, a trend that is only going to accelerate as we approach the deadlines for the phase out of internal combustion engines in key countries. Companies around the world are also being increasingly ambitious in their commitments to decarbonising their operations, which will likely act as a catalyst across the entire supply chain.
“In additional to commitments by governments and companies, and changing consumer habits and demand, it also worth noting that an important driver of the energy transition is cost. According to Bloomberg New Energy Finance, solar PV (photovoltaics) or onshore wind is now the cheapest source of new power generation in countries that make up two-thirds of the world’s population and 85% of electricity demand. This trend – which is being driven by improving technology efficiencies as well as falling costs – is continuing to drive investment in renewables”.
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