China International United Petroleum & Chemicals Co., Ltd. (UNIPEC) announced that the world oil demand will peak at 104.4 million barrels per day (bpd) in the mid-2030s. This is up from the current of 100 million bpd. The law of supply and demand primarily affects the oil industry by determining…
China International United Petroleum & Chemicals Co., Ltd. (UNIPEC) announced that the world oil demand will peak at 104.4 million barrels per day (bpd) in the mid-2030s.
This is up from the current of 100 million bpd.
Background
The law of supply and demand primarily affects the oil industry by determining the price of the “black gold”. Oil prices have been one of the most watched trends in economics during the 21st century. From 2000 to 2008, the price of oil saw an unprecedented spike, going from under $25 per barrel to almost $150 per barrel. The rapid increase in demand from emerging economies such as China and India and production cuts by the Organization of Petroleum Exporting Countries (OPEC) in the Middle East, drove the price of oil to record heights.
In January 2018, for the first time in three years, the price of oil reached a record high of $70 per barrel. The last time oil was valued this much was in December 2014.
Peak oil: The Peak Oil theory refers to the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter a terminal decline. Though this concept can be confused with oil depletion, it denotes to peak before terminal depletion occurs.
Read more of extensive analysis of the volatile oil market and the rising prices here and here
Analysis
The world oil demand is estimated to peak at 104.4 million barrels per day by 2035 which is just up from the present estimate of 100 million bpd according to UNIPEC’s President Chen Bo.
President Bo said at the annual Asia Pacific Petroleum Conference (APPEC) that due to an improvement in energy efficiency and new technological changes the growth in oil demand would slow down in the coming years before peaking in 2035. He estimated that the global oil refining capacity would hit 5.6 billion tonnes per year in 2035.
Referring to the trade dispute between China and the US, he said that despite the tensions, the US crude supply is an important source for Chinese refineries. It allows diversification away from the Middle East and African crudes, on which China has relied heavily. He said that the trade war would last “for the time being, and in the future, we’ll be active in this area.”
A recent report published by OPEC reveals a significant revision in the production estimates. They expect global oil demand to reach nearly 112m barrels per day by 2040, driven by transportation and petrochemicals. That is up from almost 100m today and higher than last year’s projection.
According to the report, the world’s airlines will be the single fastest-growing user of oil; however, the largest absolute growth is expected to come from road transport. The world’s vehicle fleet will more than double to 2.4 billion vehicles by 2040, OPEC forecasts.
Counterpoint
Some analysts have argued that world oil demand could come down faster if there were more efficiency gains in vehicles and greater market penetration by electric cars. Many sceptics have argued that the world will need fossil fuels for decades to come and the real point of inflexion might arrive sooner. Consider the US coal industry as an example. Though coal miners have gone bankrupt, share prices have fallen, it still accounts for around a third of U.S. electricity. Therefore, whether the peak in oil will result in a transition to cleaner energy on environmental grounds is still doubtful.
Assessment
Our assessment is that the oil market is highly volatile and speculators are likely to play a crucial role in determining the price. We feel that if the transition does occur as mentioned UNIPEC, combined with lower economic growth and higher fuel prices, the demand for oil could reduce. We believe the rising tensions caused by the US sanctions on Iran and the US-China trade war will have implications on countries across the world including India.
India Watch
India is the world’s third-biggest oil importer and imports more than 80% of the oil it requires. The country procures 4.4 million barrels per day (bpd) oil in August, costing about $12 billion, according to government data.
Indian refinery officials are considering a reduction in oil purchases in order to mitigate the pain of high crude prices and the declining rupee. Recently, the benchmark Brent crude oil prices climbed to over $80 per barrel, capping a nearly 30% gain from their low for the year on Feb. 13. However, in rupee terms, the oil price has gained 46% since then as the Indian currency has plunged to a record low against the dollar.
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