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Page added on February 25, 2017
Why Oil Demand Forecasts Have Become A Guessing Game
Get yourself a ruler, a pencil and a piece of paper. Place the ruler at about 45 degrees and draw a line upward across the page.
That’s what a chart of world oil consumption looks like over the past 30 years, give or take a few shakes off the line (Figure 1).
That was easy. Now think about how to draw oil consumption over the next three decades.
Plenty of pundits are scrubbing their spreadsheets and fidgeting with their rulers to show us the answer.
Some forecasters are economists who work for multinational oil and gas companies and government agencies. Most of their oil outlooks extend upward. The biggest uncertainty is the angle of their rulers.
The steepest slope assumes that our prevailing consumption habits and government policies are extended out a few more decades. Oil demand reaches nearly 120 MMB/d at the top of this cluster, up almost 25 percent from today. More moderate trajectories in the group are based on pledges made pursuant to the November 2015 Paris Climate Change Conference; but tallying up country commitments still suggests modest growth to between 100 and 105 MMB/d by 2040.
A group of weaker outlooks tilt downward like a loosely held hockey stick. Clustering between 73 and 80 MMB/d by 2040, this collection of prognostications assumes more aggressive global efforts to limit carbon loading in the atmosphere and the faster adoption of innovations like electric vehicles. The International Energy Agency’s 450 Scenario is the most bearish demand outlook among these peers.
Environmental groups don’t equate fossil energy usage to classroom instruments or clichéd sports equipment. Slick oil charts from naysayers with green-coloured glasses look more like a BASE jump gone badly. The most catastrophic scenario appears to come from Greenpeace, which proposes that pipelines will trickle in the range of 35 MMB/d by 2040.
What and whom to believe? The range of consumption estimates 25-years out is wider than the tailgate of a Ford F350; on one end is 35 MMB/d, on the other 120 MMB/d. Even the top cluster varies by 20 percent
Given the 80 MMB/d range in opinions and analyses (each convincing on their own), stakeholders in the oil business may feel a tendency to adopt a, “the truth lies in the middle,” forecast. This method instructs us to believe a midpoint somewhere between denial and exuberance.
Taking the median of all expert opinions and calling it the “consensus” of wisdom suggests oil demand will drop by 20 percent over the next quarter century. I don’t find this approach satisfying. Looking through a row of ten cloudy crystal balls doesn’t yield a new one of greater clarity.
For over 100 years, the oil industry and its stakeholders have believed that the market for their products will continue to grow ad infinitum without competitive challenges. Today, that thesis is about as useful as a bent ruler and a broken pencil.
Never in my 35-year career following energy markets has there been so much widespread disagreement about future demand for oil. And it’s a relatively recent confusion, one that’s been emerging over the past decade, but heightened in the past couple of years due to the potential forces of technological change and carbon regulation.
An 80 MMB/d disagreement in various outlooks says to me that there is little value to add by uploading yet another spreadsheet into an already foggy cloud of forecast charts.
I’m only confident in one fact and one forecast.
Fact: There is widespread ambiguity in expert outlooks for oil consumption, one of the world’s most vital commodities.
Forecast: The uncertainty is not going to diminish over the next five years at least. In other words, trends in technology, policy, economy and social factors are going to put wider and wider error bars on every pundit’s numbers.
In my mind, the fuzzy question of, “How much oil is the world going to consume by 2030 and beyond?” must now yield to sharper, qualitative thinking.
Pencils and rulers down, the questions going forward are, “What type of decisions will be made—relating to investment, corporate strategy, government policy and so on—under unprecedented uncertainty, and how will these near-term decisions affect the world’s long-term energy future?”
I’ll be pondering answers to these questions during my commute to work and back – in my new electric vehicle.
To be continued…
By Peter Tertzakian for Oilprice.com
7 Comments on "Why Oil Demand Forecasts Have Become A Guessing Game"
Davy on Sat, 25th Feb 2017 9:15 am
Well, first there is no forecast for economic decline and demand destruction in this article. This makes the range of possibilities better described as a range of optimistic possibilities based upon techno optimism and carbon reduction policies. It is not that these viewpoints are necessarily wrong but that they do not fully reflect reality. The reality is an economic period of stagflation and infrastructure decline is likely happening now and highly possible as a dominant force of decline going forward. This may not be a dominant force for a few years. These forces may be dismissed and disregard for a few years but that doesn’t not mean they are not there below the surface. Global growth even though it is not healthy is still a momentum. It is a declining momentum because of the inertial forces of deflation and demand destruction.
Uncertainty of oil forecasting is now higher than ever because we are in a bumpy plateau of technological changes with alternative and a time of economic stagnation. We are seeing ample examples of stagflation and the limits of debt. We are seeing irrational exuberance in the markets pointing to a correction. A correction at this time may not be recovered from considering the extremes of economic divergences from what was once a normal. The economy drives oil as much as oil allows an economy. The economy definitely drives alternative technologies because of their high investment cost upfront. Depletion and infrastructure decay is alive and well making oil’s economic value lower by the day.
Any forecast out 10-20 years are invalid just by their nature. They are nothing more than an example of a civilization trying to perpetuate itself by maintaining confidence and economic investment. If the social narrative came out today and said we have crippling energy issues in as little as 5 years this would likely initiate a depression if there were no plan B’s. We who research these issues know there are no plan B’s to the status quo. If the people in positions of respect and leadership said these things it would spell the end of the status quo. This is why you can’t put any validity in longer term forecasts because they are serving an agenda of disguising the possibility of imminent decline.
Alternatives and battery technologies are going to be a force in the next few years if and only if the economy stays healthy. The will be a transforming one in some ways but likely not an energy transition paradigm. The oil industry can continue to deliver product for a few years because we appear to be in a period of stalling growth allowing latent reserves to fill a declining need. It will be the combination of alternatives and the declining need for oil that might allow us a gentle decline that is until we breach minimum operating levels. These are systematic levels and reflect what is needed by the global system to maintain all the critical support systems and networks that ensure system survival. At some point decline will be catastrophic but it is unclear when that might be.
Now more than ever we need honesty and reality but it is that same truth based discussions that could damage economic confidence that leads to self-fulfilling results. It is appearing more and more like a trap and the reason we have these unbalanced and optimistic only forecast. They allow us to disregard reality and continue humming along as we approach a cliff.
Mark Ziegler on Sat, 25th Feb 2017 10:29 am
We need real leadership that can drastically change our infrastructure to utilize a comprehensive rail system. That would push back peak oil and climate change by decades. It would also make the world a safer place giving the direction our leaders are taking us.
https://www.youtube.com/watch?v=UUKvanezliM
penury on Sat, 25th Feb 2017 12:55 pm
As always, the demand for energy going forward will depend upon the economic health of the nations of the world. If you see an increase in the economy then your forecast will be higher, if you see a downturn then the demand will be less. At the current time I would vote with Davy.
Antius on Sat, 25th Feb 2017 1:28 pm
In order for oil demand to keep rising, people need to have money to pay for it. Look at any graph showing private and government debt in any moderately developed country, and it is basically an exponential curve. An interest rate rise is all that would be needed to trigger another financial crisis.
The first time it happened, governments and consumers alike could keep borrowing to maintain their spending. Next time that won’t be an option. Debt in China is now pushing for 300% of GDP. Another financial crisis will finish them. Western countries are in similarly poor positions.
Apneaman on Sat, 25th Feb 2017 11:21 pm
And the oil rout continues unabated..
https://damnthematrix.wordpress.com/2017/02/26/and-the-oil-rout-continues-unabated/
Jerome Purtzer on Mon, 27th Feb 2017 6:13 pm
Hey Davy, sounding a little like Alan Greenspan, irrational exuberance leading to a frothy pithiness. You gotta love economists when it comes to invention.
Davy on Mon, 27th Feb 2017 6:38 pm
Yea Jerome, I had to borrow Alan’s expression because what else could fit the craziness we see today in the financial markets.