I’m sure you’ve seen reports this week about how bp is predicting Peak Oil. it’s a scenario that is considered in this year’s annual bp Statistical Review of World Energy. You can view it here. Bp has clearly been concerned about it for some time; the rebranding to lower case "bp" and the "beyond petroleum" tag line have lit that up for years. Recent mult-billion hydrocarbon divestment programmes and renewables investments such as last week’s offshore wind deal with Equinor, have illuminated bp’s path to ‘net zero by 2050’ as its own website proclaims and as the company announced as recently as August this year.
The headline that most media have latched onto is the possibility that the world may have reached or may be about to reach peak oil consumption. Demand for the black gold may never recover from the economic effects of the coronavirus pandemic. The bp Review suggests that the scale and rapidity of oil’s decline depend on the rate of decarbonisation of transport, particularly road transport, which accounts for two thirds of every barrel of refined petroleum products.
Opec’s latest report, published this Monday on the Organisation’s 60th birthday, projects a 9.5 Mn bpd fall in oil demand in 2020 compared to 2019, a downward revision from the 9.1 Mn bpd fall projected in their last report in August. The reason is squarely Covid-19 and the uncertain economic recovery that may follow it. Oil demand forecasts in important Opec customers like India are therefore vulnerable to further downward revision. Still, Opec thinks that oil demand in 2021 will rise 6.6 Mn bpd from 2020 levels, a 0.4 Mn bpd cut from August’s outlook. That must be dependent on a big, fragile assumption about an end to the global public health emergency.
Currently the Opec – Russia production cap is keeping nearly 8 Mn bpd off the global markets. Will that production (and export) ever return? The world may bounce back from Covid-19 in the next couple of years – though it’s not easy to assume the entire global population will be given affordable access to a vaccine, or that enough individuals will be willing to be vaccinated. But coming on the heels of that will be further global warming, greater pressure for decarbonising the global economy, and more action on doing that, as bp has made clear.
Consider the decarbonisation of electricity generation. The process consumes very little oil these days. Most direct-burn oil-fired power stations have gone the way of the dinosaurs. But how does the coal get to the coal-fired power stations? By sea, and coal shipping consumes a million barrels a day of fuel oil to do that. What if China, which keeps chopping and changing its coal market policies, decides to phase out coal in favour of renewables? What happens to the billion tonne annual coal shipping market? What happens to all the coal carriers, even those fuelled by LNG? (see my earlier blog, “A nuclear sub with a recycling bin” for more details).
There will be an effect on oil demand from the withdrawal of coal from power generation. We may be reaching peak coal too, as increases in consumption in places like China and India are offset by reductions in post-industrial nations. Already renewable energy sources account for 40% of global primary energy production. This year, coal use has fallen to its lowest level in the last 16 years, due in large part to coronavirus. The UK, the first country to burn coal in large amounts for industrial use and power generation, has burned no coal at all for generating electricity since 9 April 2020 – aided by the slump in electricity demand after the Coronavirus lockdown began at the end of March and by very fine summer weather.
Anyway, back to the particulars of oil. If Opec is right, demand will fall by 9.5 Mn barrels per day this year – that’s about five VLCC cargoes, every single day, or 1,825 cargoes a year. That’s not far off China’s crude oil import levels on VLCCs. China’s overall oil imports reached a record 12.08 Mn bpd in June as buyers took advantage of low oil prices. The average level for 1H20 was more like 10.78 Mn bpd.
The Middle East supplies about 70 per cent of China’s oil. Let’s call that 7.6 Mn bpd basis China’s average imports in 1H20. That’s four VLCCs arriving in China every day. To meet that demand, 243 VLCCs are fully employed on six round trips a year. That’s near enough 30 per cent out of a total global fleet of 814 VLCCs. Imagine what taking that level of oil shipping demand out of the global economy permanently would do to the VLCC market.
India, the other major growth importer of crude oil in the last decade, imported 57.2 Mn T of oil in April to July, the first quarter of India’s financial year, compared to 74.6 Mn T in the same period in 2019. India’s Minister of Petroleum Dharmendra Pradhan reported that data to Parliament on Monday. I make that a fall to 4.49 Mn bpd from 5.88 Mn bpd, not far off a VLCC every day. It’s shorter distance from the Middle East to Jamnagar than to Dalian but still a significant reduction in shipping demand.
The longer it goes on, the less likely the overall reduction in oil demand is to reverse, though it’s hard yet to see what the long-term economic consequences of coronavirus will be. Slower population growth in the cities and a flight to smaller towns - as is happening in the UK and elsewhere – may actually increase demand for personal passenger transport like cars as public transport networks can’t quickly adapt to these significant changes. But that may not increase oil demand. If governments are to meet their Paris Accord commitments, then ‘building back better’ has to mean a faster switch to non-hydrocarbon fuels for road transport.
My thought experiment was, what happens to an oil tanker market in which the equivalent of China’s daily oil import requirements is permanently deleted? What happens to the oil products tanker market if gasoline and gasoil demand have peaked? Much depends of course on the geographical distance between oil fields, refineries, and consumers. But ship owners are right to be wary of ordering oil tankers at the moment. Through a combination of regulatory and market risk, a fuel oil burning VLCC or MR tanker ordered today could be a stranded asset by the end of the decade.