Global oil and gas demand could remain strong longer than expected due to an investment gap in green energy and weaker commitments to clean energy by both policymakers and corporations.
This could result in a need for increased upstream investment to meet the growing demand for oil and gas, according to an analysis by Wood Mackenzie.
The International Energy Agency (IEA) remains optimistic, predicting that global oil demand will peak by the end of this decade. However, key industry players, including oil producers and commodity trading giants, foresee peak demand occurring later, likely in the next decade.
Vitol, the world’s largest independent oil trader, expects global oil demand to reach nearly 110 million barrels per day (bpd) by 2030. The demand is expected to stabilize at these levels before gradually declining from the mid-2030s onwards. By 2040, Vitol forecasts global oil demand will be around 105 million bpd, which is close to the current level.
This demand is not expected to see a dramatic decline due to rising populations and an expanding middle class, which will increase the need for petrochemicals, plastics, and jet fuel. The drop in gasoline and diesel consumption for transportation will only partially offset these increases.
Vitol’s outlook highlights that societies will continue working towards climate change goals, but they will avoid actions that could financially harm them.
Across the industry, experts agree that peak oil demand will occur between 2030 and 2035, but a steep decline in demand is not expected. Instead, demand is projected to remain high for the foreseeable future.
However, supply may struggle to keep up. As oil fields mature and deplete, continued investment in upstream oil production is necessary just to maintain current supply levels. Wood Mackenzie analysts emphasize that even more investment will be required to sustain strong oil and gas demand.
A recent report from Wood Mackenzie warned that without significant changes in policy and investment, the world will face a slow-paced energy transition. The report also pointed out that inflation and budgetary pressures have weakened the commitment of both governments and corporations to invest the estimated $3.5 trillion annually needed to build a low-carbon energy system and meet the goals of the Paris Agreement.
While global investments in green energy reached a record $2 trillion last year, BloombergNEF reported that the world needs to invest $5.6 trillion annually in low-carbon energy to stay on track for achieving global net-zero emissions by 2050.
The transition to clean energy could be delayed by lower-than-expected investments, rising energy demand, and a renewed focus on energy security and affordability rather than sustainability. This could lead to more investments in conventional energy sources like oil and gas.
However, the current level of investment will not be sufficient to meet the growing demand, according to Wood Mackenzie’s Delayed Energy Transition Scenario (DETS).
In this scenario, upstream production would need to increase by an additional 6 million bpd of oil (6% more than the base case) and 3%, or 15 Bcfd, more natural gas by 2050. To meet this demand, global upstream investment would need to rise by 30%, from $500 billion annually to $660 billion per year.
Currently, major oil companies are unlikely to break their financial discipline as they aim to attract investors with shareholder payouts of up to 45% of cash flows. Despite record earnings in 2022 and strong profits in 2023, these companies have stated that they will maintain their capital discipline through 2024.
With ongoing geopolitical and macroeconomic uncertainties, both supply and demand remain highly unpredictable this year. As a result, upstream companies are likely to keep spending under control and wait to see how the energy transition and global economy evolve in the near to medium term.
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