Oil forecasters no longer project a Hollywood ending for crude. These days, it's more of a Bollywood ending.
We wrote here about the torch of oil demand being passed from the industrialized world to emerging markets, especially China, in the past decade or so. Equally as important: The same trend can be seen in forecasts for future oil demand.
We went through a decade's worth of annual long-term demand projections from the International Energy Agency (the latest set came out earlier this month). Back in 2006 -- those halcyon days before the financial crisis, quantitative easing and One Direction -- the IEA's base case was for global oil demand to rise by almost 40 percent by 2030, topping 116 million barrels a day. That uber-bullish view has been tempered somewhat since:
From 2010 onward, the IEA's central case has been called "New Policies," reflecting a scenario where governments make good on stated commitments to combat climate change but not a gung-ho decarbonization effort. That's a big reason why the lines start to curve after 2010, rather than just shoot straight up and to the right.
Beneath those bends in the forward arcs of demand are some important geographical shifts.
The most striking one concerns the industrialized world. Until 2008, the OECD was still viewed as a source of long-term growth in oil demand. The U.S. alone was forecast to burn 25 million barrels a day by 2030 (current estimate: 15.5 million). But the financial crisis, coupled with sharpened expectations of what efficiency gains and deteriorating demographic trends would do to consumption, put paid to that -- and how.
Compared with 2006 projections, the OECD's forecast demand in 2030 is lower by almost 21 million barrels a day -- roughly equivalent to the current combined output of Saudi Arabia and Russia. Notice, too, that even as low oil prices have boosted OECD demand in the past year or so, the projected decline has only accelerated, emphasizing the primacy of structural trends in those markets.
China, of course, picks up some of that slack. Again, though, expectations aren't what they used to be, as China's breakneck expansion gives way to slower, more services-led growth and the country grapples with the economic and environmental liabilities built up over the past couple of decades.
The one big market where they still make the charts just like in the old days is India.
Little wonder oil majors such as Rosneft are moving aggressively to lock up that market for themselves.
As Bollywood endings go, however, this one's a bit lackluster. The projection for 2030 has risen by 1.7 million barrels a day since 2006 -- which is helpful, but nowhere near to offsetting the 22 million-a-day drop in expectations for both the OECD and China. With structural forces limiting demand growth in so much of the global oil market, hopes of future increases rest on an ever-narrower set of economies -- which will themselves be subject to some of the same structural forces serving to limit demand growth elsewhere (technology has a habit of crossing borders quite easily).
This matters because, as the chart below shows, the consensus view on demand remains pretty faithful to an upward, linear path.
The IEA's own three scenarios show how wide the potential set of outcomes are (the "Current Policies" one essentially recreates the old base case from a decade ago).
For oil majors making decisions about multi-year, multi-billion dollar investment projects today, this is especially important. Their natural bias -- along with most everyone else's -- is to assume global demand will keep rising much as it has in the past. The tectonic shifts in those regional IEA projections suggest sticking with that viewpoint won't lead to a happy outcome.
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