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What BP went wrong about global oil demand

Environmentalists around the world have a field day this week as international media pick up on oil market forecasts in the recently released BP Energy Outlook 2020. It seems that the old theory of Peak Oil is back in the spotlight, with BP indicating that demand for oil may never return to 2019 levels. Just as BP’s report was digested, OPEC released a report that cut the global oil demand forecast by 400 bpd by 2020, predicting an average demand drop of 9.5 million bpd compared to its previous estimate of 9.1 million bpd. It predicted that demand would grow by 6.6 million bpd by 2021, which was also 400,000 bpd lower than its previous estimate. The oil cartel blames COVID-1

9-related economic problems for the downward revision. While OPEC’s report affected oil prices, it was BP Energy Outlook 2020 that created bigger waves. Both suggest that the US will face significant restrictions on bringing oil demand back online, but are a little more optimistic about European and Chinese demand. OECD oil demand is expected to recover slowly, but demand from the aviation industry is unlikely to bounce back anytime soon.

Its latest report is not the first time that British oil-giant BP has made news in recent months with its push for a greener future. But its energy impact assessment is probably the most shocking yet. The report suggested that if governments become more aggressive in their efforts to reduce carbon emissions, demand may never recover from the current downturn. It also stated that demand for oil is likely to fall dramatically over the next 30 years, mainly due to the growth in renewable energy.

While the picture that the report paints of the oil industry in terminal decline has made headlines, there are several reasons why its projections should be viewed with skepticism.

The first reason is that the current destruction of demand we are witnessing is driven by COVID-19, a black swan incident that – at some point – will subside. Meanwhile, many seem to forget that the demand picture was bleak, even before COVID brought too much oil to markets and stocks. Eventually, IOCs and OPEC will have to act to address this oversupply, and when they do, demand will respond positively. Related: China does not want to ban gasoline-powered cars at any time

The second reason to be skeptical about this report is a financial one. The demand for energy and electricity is not growing in OECD countries, but outside, mainly in India, China, MENA and Africa. These basics are inevitable. The economic and trade disruptions caused by COVID could even increase demand for oil and gas, as a possible redistribution of regional production centers from the current China focus could increase energy needs for transportation.

Third, the media and analysts must begin to divide their oil and gas ratings between the two main blocs, IOCs (Shell, Chevron, BP, Exxon, ENI and Total) and NOCs (Aramco, ADNOC, Gazprom, etc.). The future of IOCs may be as BP paints it, as financial markets and investors become more and more aware of the environment. There is a chance that IOCs will face the highest production of oil (and gas) if activist shareholders and pressure from the media / government force them to go green. Lower investment combined with lower income, margins and dividends will be the biggest threat. However, NOCs and possibly independents like Petrofac could look to a bright and prosperous future. Even if the demand for oil and gas one day reaches its peak, the call for NOC oil will increase. Lower IOC production will shift demand to NOCs and new start-ups.

Still, if, as stated by BP and media analysts, there is the threat of a peak demand for oil in the coming years, it is the IOCs that will bleed. The lack of proactive strategies and the overestimation of their own power has become apparent, although it is not yet recognized by London, The Hague and some other places. The integrated oils of the past will be removed or replaced by the new seven brothers of the future. Their margins and financial powers are different, making Peak Oil scenarios unlikely for the next 10-15 years.

By Cyril Widdershoven for Oilprice.com

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