Abstract
Hydrocarbons are the largest global energy source, and demand for them has been growing rapidly in the past decade. Unfortunately, that progress was stunted with the recent global pandemic that shut down economies and societies worldwide. As the world recovers from the coronavirus, hydrocarbons will be in high demand in order to fuel the progress of the human race. The final piece of our four part series on post-COVID oil demand will investigate the overall change in global oil demand in a post-COVID world.
Introduction
The petroleum industry is at the heart of the global progress machine as hydrocarbons are the fuel for the global energy system. Unfortunately, a global pandemic upended all aspects of society and the oil and gas industry was no different. The coronavirus has caused global demand destruction for hydrocarbon consumption and recovery will occur at different rates throughout the various sectors of the economy. As economic recovery resumes, the demand for hydrocarbons will begin to rapidly rise and quickly surpass pre-pandemic levels. Oil and gas is used in almost every industry and creates countless products that ease the way of life. From gasoline to battery parts, modern society can not function without hydrocarbons. As the world begins to reopen and a new age is ushered in, the fuel needed to run economies will continue to be essential, but the breakdown in consumption may start to change.
Breakdown of Global Oil Demand
Hydrocarbons are the largest global energy source and demand has been growing rapidly in the past decade. Petroleum products are used to make consumables like plastics, polyurethane, solvents, and hundreds of other intermediate and end-user goods. These goods help build roads, produce electricity, heat buildings, and propel vehicles. The modern world was built from products created by hydrocarbons to some degree. Without this essential resource, developed society would not be what it is today, and it would be far more difficult for emerging economies to advance.
Figure 1 breaks down the distribution of global oil demand from 2017 to show the various products made from a barrel of oil. It is important to note the term “roads” includes oil demand for all forms of road transportation, both personal and freight. The lion’s share of global oil demand is used to fuel cars and trucks all over the world. More importantly, the global transportation sector alone currently accounts for upwards of 60% of global oil demand [5].
While transportation is the largest consumption sector, hydrocarbons have countless uses across a wide range of industries worldwide. The percentage of various refined products in a barrel of oil is shown in Figure 2. While gasoline and diesel fuels are the majority share refined from oil, at least 30% of crude oil is refined into other essential goods.
The chart in Figure 3 shows demand for crude oil has steadily increased from 2009 through the end of 2019. At the start of 2020 crude oil demand was at all time highs, topping out at about 101 million barrels per day [1]. This growth phenomena would have extended back to 2006 if not for the Great Recession, a period of general decline observed in national economies globally between December of 2007 through June of 2009 [2]. While the scale and timing of the recession varied from country to country, it had a worldwide impact. Global oil demand declined for several years during this period, but a similar trend will not be experienced as the world exits the current crisis. Levels for crude oil demand in the first half of 2020 are down significantly from the 2019 end of year highs but will quickly recover through the end of 2020 and into 2021.
In April during the peak of the coronavirus pandemic, global oil demand was down nearly 22% from its record highs. According to the June release of the U.S. Energy Information Administration’s Short Term Energy Outlook (STEO), global oil demand reached 101.86 MMBPD in December 2019, but by April 2020 that value had dropped to a mere 79.15 MMBPD [4]. The demand destruction was due to economies and societies worldwide completely shutting down to stop the spread of the virus. Travel restrictions, canceled events, and lockdown orders forced individuals to shelter in place for months causing global oil demand to plummet.
Regardless of the global pandemic, many experts predict overall oil demand will rise into the foreseeable future until efficiency improvements in the transportation sector force an eventual plateau. A representation of this in Figure 4 highlights an analysis by oil and gas supermajor BP estimating global consumption of liquid fuels through 2040. While the timeline for a return to record high levels of oil demand remains uncertain, one fact is clear: current society was built by hydrocarbons. In order to maintain this progress, demand for oil and gas must continue to rise well into the future.
Petrochemicals and Construction Materials
Found across a vast range of modern products, petrochemicals are part of the fabric of our society. Petrochemicals, chemicals derived from petroleum or natural gas, play a major part in today’s economy and are essential to the chemical industry as demand for synthetic materials continues to grow. Petrochemicals are used to manufacture thousands of different products people use daily including plastics, medicines and medical equipment, cosmetics, clothing, furniture, appliances, electronics, tires, solar panels, and even wind turbines [6]. Additionally, the materials to build roads for transportation across the world as well as the fabrication of homes is only possible with products created from the oil and gas industry. In fact, almost all products used in road construction and roofing are byproducts of crude oil. From asphalt and tar to shingles and caulking, construction materials made from residual/residue crude left over after the refining process are the backbone of many construction materials.
According to Statista, a global data analytics firm, petrochemicals accounted for 14.38% of global oil demand in 2017 [1]. The fact is that demand for synthetic materials and plastics has risen over the years and will continue to rise well into the future. That portion of global demand will keep increasing. In fact, the EIA predicts the growth in demand for these products means petrochemicals are set to account for over a third of the oil demand growth by 2030 and nearly half by 2050, ahead of trucks, aviation and shipping [2]. While it is difficult to obtain an exact value of oil consumption used for construction materials, it is logical that growth in the transportation sector will continue to support this industry. Construction or repair needed to maintain the hundreds of thousands of miles of global roadways makes up just over 3% of global consumption and will not be decreasing. Construction growth will be on an aggregate scale since roads are a shared asset. Compared to the larger per capita growth expected in the petrochemical sector, there will be continued oil demand for both products in the foreseeable future.
There was a drop in demand at the peak of the pandemic for petrochemicals and construction materials due to reduced essential activity but this sector will quickly pick up and return to pre-pandemic levels by the end of the year. Table 1 shows an approximate percentage of oil used for these products before the pandemic and the direction of anticipated demand recovery. Looking forward, the energy used to manufacture and build daily staples to meet the quality of life expected in society will only continue to expand.
Freight Transport
Freight transport/shipping is the process of transporting commodities, goods, and cargo by land, sea, or air. More specifically, the transport of goods and cargo by truck, ship, or airplane [10]. Not surprisingly, fuel to power the vehicles carrying these items comes from the oil and gas industry. While the onset of COVID-19 may have frozen some freight shipping between nations temporarily, it did not diminish the importance of maintaining supply chains to provide consumers with essential goods and services. Food in grocery stores, homebuilding supplies, toilet paper, cleaning products, protective masks, online shopping orders, and countless other items still need to be packaged and transported around the world to reach the end consumer.
E-commerce shipments rose over 40% during the pandemic as customers were unable to obtain goods in person from stores around the world. Now that many stores are opening back up, online orders have hardly dipped. The result is compounded demand growth ensuring the need for commercial trucking will not stop. Demand will continue to grow well into the future regardless of social distancing or lockdowns. Reduced air freight capacity and surging freight costs caused air freight levels to take a brutal blow during the pandemic as only essential items like medical supplies and PPE were being shipped. If public concern for health and safety remains high, PPE will continue to command the lion’s share of airfreight capacity until passenger flights pick back up and increased cargo space reduces soaring prices. Once it becomes economic to again ship other goods by air, fuel demand for air freight will return to pre-pandemic levels. All the foregone air freight created an immense backlog of orders that will propel other areas of the shipping industry to new heights. Until air travel allows for economic shipping at a high volume, new cargo opportunities have presented themselves for shipping vessels. Sea based cargo shipments were hard hit due to regulations attempting to contain the virus, but demand is quickly picking up as restrictions ease. While still below historic pre-pandemic levels, sea freight has increased in both container and cargo ships in recent weeks. The lack of available air freight has made slower modes of transportation like sea and land shipping a viable alternative for less time sensitive products. This demand is expected to grow in the ensuing months and remain elevated for the foreseeable future.
Table 2 gives estimates for the amount of oil demand used in various freight shipping methods before and after the coronavirus crisis. The need for freight transportation to supply goods to people all over the world will continue to grow on both an aggregate and per capita basis regardless of implications from the pandemic. Whether by truck, airplane, or ship, one of the highest consuming areas of oil demand is fuel for freight transport. Although temporarily stunted during the pandemic, future consumption will rise to new highs as the world changes its purchasing preferences and delivery options in this new age.
Personal Transportation
The transportation sector accounts for the majority of global petroleum consumption. For the United States in 2018, both personal and freight transportation accounted for a staggering 69% of daily petroleum consumption [8]. Looking solely at finished motor gasoline used in personal vehicles, this single petroleum product accounted for 45% of total daily petroleum consumption and over half of all petroleum products used in the transportation industry [8]. While a further breakdown of personal transportation begins to become more difficult since a large portion of airfreight is flown in passenger jets and diesel fuel is used in freight trucks, personal trucks, and busses; it is safe to say personal transportation accounts for the largest majority of petroleum consumption worldwide.
Public transportation has been a life saver for many cities and citizens worldwide. It alleviates traffic, reduces emissions, and allows people who do not own a car to easily cover distances when walking is not an option. Fortunately during the pandemic, these services were still provided but with reduced hours and route options due to diminished demand. As more and more people begin to need public transportation again, logistic issues will also rise. It will be impossible to enforce social distancing guidelines at peak hours in crowded cities when individuals pack trains and busses like sardines. Due to already stressed budgets and a reduced rider capacity, municipal support in the public transportation sector will begin to decline and fuel demand to run fleet vehicles will fall as well. While it is highly unlikely mass transportation will completely disappear in the future, it will decline until a safer viable alternative can be reached.
A majority of individuals displaced by reduced rider capacity and route options for public transportation will resort to travel by personal vehicle. Whether it be by car, truck, SUV, or motorcycle; as the world moves out of the pandemic more and more people will begin to prioritize this method of transportation. Remote working and learning might become the new normal, resulting in fewer cars on the road for individuals that used to commute but the decrease caused by remote workers will be dwarfed in comparison to the number of individuals no longer using public transportation. Furthermore, some people may fear carpooling and choose to drive alone. Taking into account the inevitable increase in global population, more personal vehicles will be on the streets compounding an increase in gasoline consumption worldwide into the foreseeable future.
The airline industry has been through many ups and downs, but the current level of reduced demand for air travel is unprecedented. Globally, airlines were forced to cut over half of their flight options during the peak of the pandemic in April as a result of nearly zero passenger air travel demand. While this demand is slowly on the rise, experts do not expect a full recovery in air travel for several years. Even though it is not the largest petroleum consuming sector, the result will leave millions of barrels of daily oil demand off the table for the next few years.
While the coronavirus pandemic may have slowed the movement of people in the short term, it will not eliminate transportation into the future. Certain aspects of life will need to change as the world adjusts to a post-COVID society, but the vehicles moving people around to ensure properly functioning communities will continue to be a necessity. Table 3 gives a breakout of approximate global consumption for personal transportation before COVID and estimates for usage following the pandemic. The fuels to transport humanity around the world are created from oil and natural gas, and usage decline in public transit and air transportation will be offset by the personal vehicle sector. As a result, the overall aggregate demand for personal transportation will remain neutral on a global scale into the future. Life may change after the pandemic, but the energy used to transport people in order to meet and share their ideas will continue to be a fundamental piece of modern society.
Conclusion
The decade’s start has been quite the whirlwind. The year started bumpy with Australian wildfires, threats of war after military actions, and impeachment trials for the President of the United States. Then things began to get crazy with the emergence of a pandemic shutting down societies and economies worldwide. It is only July and the world has already been through a gauntlet in the first half of 2020. As the world begins to recover, rebuild, and reopen from the global pandemic, a new age will be ushered in – a post-pandemic normal.
The coronavirus has caused global demand destruction for hydrocarbon consumption, and recovery will occur at different rates throughout various sectors of the economy. Data shows world crude oil demand in the first quarter of 2020 declined by the largest volume in history – even exceeding declines during the 2009 financial crisis [9]. As economic recovery resumes, the demand for hydrocarbons will begin to rise and quickly surpass pre-pandemic levels. People around the world will still need plastics for their daily activities, roads and vehicles to travel from place to place, goods and services provided by and shipped with hydrocarbons, and other consumables derived from crude oil.
RARE PETRO (RP) is predicting global oil demand will surpass 2019 levels by the start of Q4 2021 meaning that in just one year, global demand will surpass levels experienced before the coronavirus. While Table 4 shows sources like the IEA and EIA predict this level will not be achieved until year-end 2021, RARE PETRO’s analysis is slightly more aggressive and predicts this milestone will be reached several months prior. With additional information on recent demand gains and the easing of lockdown orders updated in June, RP’s estimates confidently predict recovery occurring before December 2021. Additionally, before the global pandemic the outlook for long-term demand released by Statista estimated the total global demand for oil will amount to nearly 140 million barrels per day by the year 2040 [1]. While that next great milestone may be delayed slightly due to the pandemic, demand must still increase dramatically in the near future in order to achieve that level of growth.
Table 5 represents a simplified breakdown of global oil consumption before, during, and after the global pandemic. Utilizing a breakdown of domestic consumption published by the EIA in 2018 as the backbone for pre-COVID estimates, research was compiled from the first three parts of this series to estimate domestic petroleum consumption for the United States in the new post-pandemic society. Estimates show an increased petrochemical demand for the fabrication of plastics and protective masks, continued need for construction materials to build houses and maintain roads, and neutral growth in personal transportation overall. The decreases in air and bus travel will be more than offset by an increase in personal vehicle usage. Increased freight transport highlighted by large jumps in trucking fuel consumption is also expected. Although the percentage weights have changed in the various segments before and after COVID, overall consumption volume will be larger. While these values are only estimates, they are based on research and data to create a representation of how domestic hydrocarbon consumption will likely look like for the foreseeable future.
When predicting global oil demand, one must look at the big picture. It is easy to recognize that developed countries who represent 80% of world trade and investments, like members of the Organisation for Economic Co-operation and Development (OECD), will slow their hydrocarbon consumption in the future from increased usage efficiencies [10]. But, the story for developing countries will be quite different. Of the predicted 140 million barrels of daily demand needed in the year 2040, developing countries are expected to account for nearly 67 million barrels per day of demand (47.9%), OECD nations will account for a total of 38.7 million barrels daily (27.6%), and the 14-member Organization of Petroleum Exporting Countries (OPEC) is projected to demand 12.3 million barrels of oil per day (8.8%) [1]. The remaining 22 million barrels (15.7%) of global demand will be consumed by other developed countries. This data indicates that most of the demand growth will come from developing countries while the steady need for hydrocarbons will be maintained throughout the developed world before an eventual decline in OECD countries.
Oil and gas are used in almost every industry and create countless products that ease our way of life. Figure 6 is a representation showing the multitude of products created from oil and the enormous impact hydrocarbon energy has on modern daily life. From gasoline to tupperware, the world can not function without hydrocarbons, and they will continue to play a significant role in the global energy system. Bottom line: once the world recovers from this pandemic a high demand for hydrocarbons will continue to build and fuel the human race. Progress may have temporarily slowed, but human resilience will manifest from these trying times to build a better post-COVID society.
References
[1] https://www.statista.com/statistics/271823/daily-global-crude-oil-demand-since-2006/
[2] https://www.history.com/topics/21st-century/recession
[4] https://www.eia.gov/outlooks/steo/report/global_oil.php
[5] https://www.bp.com/en/global/corporate/energy-economics/energy-outlook/demand-by-fuel/oil.html
[6] https://energyeducation.ca/encyclopedia/Petrochemical#cite_note-2
[7] https://www.iea.org/reports/the-future-of-petrochemicals
[10] https://www.thebalance.com/organization-economic-cooperation-development-3305871
[11] http://www.kleanindustries.com/s/environmental_market_industry_news.asp?ReportID=672085
[12] https://www.iea.org/topics/oil-market-report
[13] https://www.eia.gov/outlooks/steo/report/global_oil.php
[14] https://mercercapital.com/energyvaluationinsights/a-bright-spot-at-the-bottom-of-the-barrel/
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