BP’s Head of Global Macroeconomics William Zimmern hosted a fascinating discussion on the long-term outlook for oil and energy markets at BP’s London St James Square offices.
William’s focus was on BP’s 2018 ‘Energy Outlook’, an annual publication that considers a range of scenarios for long-term structural trends in energy markets over the next 25 years. In particular the firm’s so called ‘evolving transition scenario’ assumes a continuation in recent trends in energy technologies, but with no major structural changes or significant shocks.
In this forecast global growth of 3.25% is assumed, which is similar to that of the past 25 years, split roughly into three quarters productivity growth and one quarter population expansion. Much of this growth is expected to come from developing rather than developed countries.
As a result energy demand is seen by BP rising by a third over the 25-year horizon, or 1.3% per year - while that is down from past annual rates of 2% it is due to improved efficiency. All of this rise in demand growth is ascribed to developing rather than developed countries, with China and India together accounting for half of it. In the final decade of the forecast India is the biggest single driver of demand growth, while Africa becomes responsible for as much a quarter of total growth.
William then turns to market shares, noting that renewables are forecast to rise sizeably from 4% to 14% of energy output over the forecast period. Coal usage is seen as flat-lining thanks to demand peaking in China, and while oil should continue to grow it should lose market share over time - according to BP. Gas gains market share. All in all, William notes the more diversified fuel mix we are likely to see emerging in the coming decades, and a slippage in oil’s dominance.
Whether it be oil, gas, coal, or non-fossil sources, William argues that fuel supply is currently in abundance. Different fuel types are beginning to compete with each other sectorally like never before - for example, electricity and gas penetrating the transport sector, renewable becoming competitive in providing power vis a vis gas and coal, and electricity supplanting coal and gas usage in industry.
William concludes by looking at three key questions for the future of the energy market. First, electric vehicles (EVs). Of the current 1 billion vehicles on the roads globally just 2 million are electric of some form. Car ownership is set to double to 2 billion over the next 25 years thanks largely to China and India according to BP estimates, of which EVs are forecast to rise to 300 million. By kilometres driven (which it is argued is a better measure than simply ownership given the likely higher intensity of use of EVs) however, electric vehicles could account for almost a third of total usage by 2040. That share could rise to as high as 80% over the same time frame if governments decide to introduce bans on the internal combustion engine (ICE). The impact of such a ban on carbon emissions, however, might be relatively small given that cars only account for 20% of total oil consumption and they are relatively low emission in the first place. As a result, William argues that EVs are not the solution to the carbon issue.
Second, when will oil demand stop rising? BP’s forecast assumes that oil demand rises by 10mbd to 110mbd by 2040 and the firm sees peak oil demand in the mid-2030s (early-2030s in the event of an ICE ban). There is much uncertainty around this forecast and it is noted that oil demand could peak rather later if efficiency grows at slower rates than assumed.
Finally, how fast will renewables grow? Forecasters have repeatedly underestimated renewables growth. One explanation for this error is Swanson’s Law - that for every doubling of renewables capacity prices fall by 20% (or more like 25% in William’s view). Energy market shares tend to move slowly over time given the scale of investment that the sector requires. Still, after having reached 1% of global energy output in 2008, William concludes by arguing that renewables should penetrate global energy markets quicker than any other fuel in history.
With many thanks to William and BP for hosting the event.
Vice Chair SPE, 2 May 2018