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The Future of Oil Demand


In their recent long term outlook, BP and Exxon as well as the IEA, but to a lesser extent, have forecast that demand for transport fuels remains on an increasing upward curve. The current forecast by BP to 2035 is around 13% growth in demand. Whereas EXXON forecasts that increase in demand will be 40% over the period 2010 to 2040.
These planning scenarios are used in determining investment in refining and marketing assets.
At present refining capacity in Europe is surplus and it is expected that some 8 refineries will shut in Europe in the next few years. If these long term outlooks are to be believed, then refinery closures would be in balance once these closures are completed.
Regrettably, we think that the demand for transportation fuels will be much less than forecast and this will result in more refinery closures than forecast and a long period of spare capacity, leading to low margins in the refining industry.
Margins have been low for some time and this has manifested itself in a number of IOCs disposing of their refining capacity. It seems almost unbelievable that Shell and BP have no refining capacity in the UK.
In this paper we take the opportunity to propose an alternative view and hope it will open a debate that could lead to a re-think to the forward demand forecasts.
The motor car industry has been an innovative industry from its birth. The F1 research teams are constantly looking at how to make the cars go faster and further on lesser fuel demand. This research eventually finds its way into the ordinary motor car. We have seen a major change in the design of cars in the last twenty years leading to more efficient use of energy. A quick overview of the changes at this stage is a useful reminder at this stage;
Common Rail Diesel Engines
Up to about 1974 these engines were primarily used in trucks and locomotives. The motor car industry was able to convert these engines to small enough scale to put them into the ordinary family car. 
However from 1974 onwards the IOCs invested in gasoline making catalytic Crackers (cat crackers) to make ever more gasoline (petrol), for which they then forecast increasing demand, which turned out to be completely wrong. They seem to have ignored what was taking place in the motor industry. The result is that European refineries are now drowning in gasoline and having to import diesel.
Blue Technology
The latest gasoline engines have also been revamped using a number of technologies. Ford introduced the ZETEC engine, Toyota Variable Valve Timing, Mercedes Blue Tech and BMW the Efficient Dynamics fuel system. All these are names for innovations to increase fuel efficiency and reduction in emissions. 
Most small car engines are now turbo charged which lead to more output for less consumption. These changes have resulted in the gasoline engine improving its energy conversion efficiency by up to 50% more than a decade ago.
The next generation of cars may well be hybrids. We are all aware that we need to control carbon and other emissions into the atmosphere and hybrids give us the opportunity to this. Toyota, with their Prius and Lexus have already successfully launched their hybrids and we see more and more coming onto the market. These cars will need to be competed with and Mercedes have already introduced the S500 hybrid for the luxury end of the market. These will be followed by all the manufacturers in turn; thus creating an unstoppable forward momentum and a lowering of the manufacturing cost.
These hybrids are giving consumption figures in the range of 60-100 mpg (4.0-3.5 ltrs/100km). These are around twice the current average car fleet consumption. The car fleets in OECD Europe and North America turnover approximately every 10 years.
CAFE or Corporate Average Fuel Economy standards are set by the US Government and determine the allowable fuel consumption for a particular type of car in miles/US Gal. These are being revised upwards by the US Government and will put greater pressure on manufacturers to introduce more efficient engines.
Natural gas CNG/LNG
The use of natural gas in trucks and locomotives is being developed all over the world but the work being done in the USA is probably the most advanced. Today a number of municipalities are converting their buses and garbage trucks to gas operation. 
The Burlington and Santa Fe railroad research facility in Colorado have stated that they expect their locomotives to be running on gas by 2017.
CNG or compressed natural gas is being considered by Shell as a potential fuel to be taken off the grid and compressed at their service stations.
In Serbia and Montenegro Gasprom are currently studying the conversion of their service station to provide total coverage with CNG.
In another field of transportation, shipping, there is a big drive to convert marine engines to LNG. This is far advanced in Sweden and Norway. The authorities of the Rhine, Moselle and Danube have agreed to cooperate with common standards to allow LNG fuelled barges to trade on their rivers.
In North America progress has been made on ferries in Canada using LNG as primary fuel and in USA new buildings for Jones Act Container ships and supply vessels for the Gulf of Mexico drilling operations have been ordered. 
Electric Chargeable battery driven cars
These are in their infancy but coming along at breakneck speed. Nissan in Japan, BMW in Europe and Tesla, GM and Ford in the USA are currently on the market and selling well.   These will have a considerable impact on demand once the economic considerations coalesce. We discuss electricity costs in the next chapter.
An interesting statistic is that in the UK 425,861 new cars were registered in September 2014 alone. The year 2014 looks like being a record for new car registrations in the UK of 2.6 million. These new cars they are all meeting the new efficiency standard.
In the USA in 2013 3.28% of all new cars registered were Hybrids and this figure is expected to increase in 2014. The USA is a different market to the EU, where the price of gasoline/diesel is taxed disproportionately higher than in the US. Therefore the pressure on family budgets in the US is not as high as it is in Europe; even so the environmental considerations are becoming more of an issue with the younger generation of car users. The success of the Fiat 500 and the Mini attest to that.
Aviation fuel
This is an area that has not yet been impacted by technological change in terms of fuel alternatives. However engine efficiency has improved considerably. Research is underway to use alternative sustainable fuels. Hydrogen power is a future potential given the improvement in materials used in storage of high pressure fuels.
The problem with Hydrogen is the weight of the storage containers. However new materials on the market such as graphene and Carbon fibre may resolve these issues in time.
We do not know what other breakthroughs are possible, however the law of probability allows for some to be economically viable.
The fuel cell generating hydrogen and oxygen from water is currently in use on small and specialist scale.  We do not think a breakthrough is on the horizon and thus we are not prognosticating a major shift to hydrogen. However who is to say that a breakthrough cannot be made?
The above summary lists the technologies for the transportation sector that we know about and that are currently in use. The new developments that are continually being launched are driven by the pressure to make energy consumption more efficient and less polluting. Regulatory pressure to reduce emissions will continue to pressurise the motor car industry to reduce demand no matter what happens to the price of oil.
The long term outlook by the IEA, BP and Exxon are sufficiently different to make us wonder what the basis for the analysis is.
The World is split into the developed world, where the car population is substantial and the third world where a motor car is a luxury that can only be afforded if truly cheap.  The car population in the OECD turns over roughly every ten years.  Most of these older cards are still viable and are sold on.  A substantial number of third world countries import second-hand vehicles from the developed world second-hard car pool.  This ensures that the energy efficiency of the car pool in the third world only lags the developed world by a short period of 10 years.  This is manifested by the energy efficiency of most third world countries having moved to 60% of GDP relatively quickly.
Using the current consumption figures for the developed world, we have seen a reduction in demand of transportation fuels of about 1.3 mmbpd since 2006.  The BP outlook shows OECD growth as static.  Exxon agrees and sees a decline in transportation fuels in the personal car sector due to the introduction of the above mentioned changes, but still sees strong growth in the heavy truck usage.
We think that the IE, BP and Exxon and the rest of the IOCs have been too cautious in their forecasts and we see demand in the OECD countries falling at a much steeper rate, due to the faster introduction of the new technology vehicles.  We also see this efficiency being transferred to the third world within the next ten to fifteen years.  Furthermore we do not see the third world developing at the same fast pace as in the last decade.  This will imply that growth in the third world will take place at a slower rate and will not offset the steeper decline in the OECD area.
In the power sector, if the CCS process begins to take hold, then the electric car will become more economical and thereafter the take-up would accelerate.  Most of the large cities of the world are especially suited to the electric car.
The table below shows BPs view of the demand changes in the Transport sector of OECD countries to 2035
Source: BP Energy Outlook 2035
It would be interesting to know the methodology used by the IOCs in preparing their forecasts. Could there be commercial pressures to maintain a forward growth curve or is it just the natural cautiousness of the forecaster?
As independent consultants we look at the demand forecasts dispassionately and what we see is that the world demand for petroleum is likely to be much less than being projected by these IOC forecasts.
If we are right about the take-up of the new technology in cars and ships then we can derive that OECD demand for transport fuels will be halved within the next 15years. The following chart from the IEA shows their forecast of growth in the alternative transmission systems in transportation and the take up of gas in heavy duty vehicles.
Source: IEA
These show that there is a stronger growth forecast for these alternative transport systems than is being used by the IOCs.
On this basis we see demand for transport fuels in the OECD area to drop by 4-6,000 mmbpd, as compared to BP’s 2,000 mmbpd reduction in demand.
The effect of this drop would mean that some 8-16 mbpd of refining capacity would be surplus to requirements. This is equivalent to the nameplate capacity of the primary distillation units of about 32 refineries in the OECD and if we are right, they would need to close. This calculation is based on an average refinery nameplate capacity of 250 kbpd and the yield of diesel and gasoline of 50%. If the yield is increased by the introduction of new equipment, like delayed cokers, then the surplus capacity will increase.
The outlook from the IOCs shows that the demand for car transportation will remain static, at around 13-14 mmbpd, the drop in demand in the OECD countries being offset by the growth in the developing world. 
This is based on an energy efficiency calculation that assumes a 0.6 to 1.0 GDP. As stated before this factor may not be the right level to use. The technology is transferred much quicker due to the second hand car market and we believe that the hybrid technology will grow at a faster rate, thus reducing the growth in demand.
Therefore we expect lower demand growth in the third world than in the OECD group, which implies a net reduction in world demand by 2035-40.
The growth in refining capacity in the Middle East and the Far East means that there is likely to be a surplus of refined products in the area for some time to come. This is being exacerbated by exports from the USA which is long light distillates and has the advantage of cheap feedstock.
We have not commented on the effect of a change in the law banning the export of crude oil from the USA, because it is impossible to foresee the outcome of the political games being played in Washington. However if the ban is maintained then the price of crude oil in the USA will remain lower than in the rest of the world and the US refiners will be able to compete and maintain pressure on product prices throughout the world. If the ban is lifted and the USA producers were allowed to export crude oil, then oil prices will come under further downward pressure and the logical deduction would be that growth might resume. However as we have stated previously, we believe that the regulatory controls to control climate change will continue to pressurise the motor car industry to increase the efficiency of its products.
Given the changes in technology that we already see around us and the fact that new technology is continually coming forward, we believe that the forecasts for transport fuels demand are too optimistic. From the work we do in the developing world we do not see the rate of growth in demand negating the reduction in demand being experienced in the OECD area.
The growth in the use of gas as a transportation fuel and the take up of electric/hybrid cars has probably been under estimated.
Channoil Consulting Ltd
November 2014


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