UK energy major BP has warned of a peak in oil demand within the next few years, signalling that the coronavirus pandemic is ushering in an earlier than anticipated decline for the fossil fuel era.
The company, in its annual energy outlook published on Monday, modelled three scenarios for the world’s transition to cleaner fuels that all see oil demand falling over the next 30 years.
In the “business as usual” case, which assumes government policies, technologies and societal preferences evolve in a manner and speed as in the recent past, oil demand rebounds from the Covid-19 hit then plateaus in the early 2020s.
In two other scenarios that model more aggressive policies to tackle climate change, oil demand never fully recovers, implying 2019 levels of 100m barrels a day will be the peak for consumption.
The new report marks a dramatic change from last year when BP’s base case expected consumption to grow over the next decade reaching a peak in the 2030s.
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The oil industry is assessing how much of the nearly 10 per cent slump in demand this year, triggered by government lockdowns and travel bans, will become permanent as work and travel patterns shift.
Bernard Looney, who became chief executive in February, said the report was “instrumental” in developing BP’s new corporate strategy for the energy transition, even as the company said the scenarios are not predictions of what will happen.
Mr Looney told the Financial Times “it was very difficult to know” how the oil market trajectory will bear out, but it was possible that demand had hit its maximum level. “Could it have happened? It could have,” he said.
The possibility of a peak has the potential to transform an industry that has enjoyed sustained growth for more than 100 years. While oil demand is not expected to collapse, a plateau or decline in consumption would fundamentally alter the outlook for investment in the industry and the willingness of shareholders to keep funding new projects.
BP said in August it will reduce production by 40 per cent and increase renewable energy spending 10-fold by 2030 as it plans to become a net-zero emissions company by 2050.
In the report, BP’s “rapid” scenario assumes the introduction of policy measures, such as a massive increase in carbon prices and a drastic reduction in emissions. Its “net zero” scenario — the most extreme — is broadly in line with reaching Paris climate goals of limiting global warming to 1.5C.
The goal of the report, BP said, was to highlight the uncertainty surrounding energy markets out to 2050.
Increasing efficiency and electrification of road transportation is one of the main drivers of a peaking in oil demand. Gas is expected to be more resilient as developing nations switch from coal to cleaner fuels. Renewables are the fastest growing segment.
Pressure from investors, environmentalists and the public on energy companies to tackle climate change is rising, yet demand for fossil fuels is expected to remain robust for decades.
Even as their share in the energy mix declines, Mr Looney said no matter what trajectory a transition to cleaner fuels takes, “hydrocarbons do continue to play a role” in the future.
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