The future according to Opec

Welcome back.

This week’s international meeting in Bonn won’t have done much to bolster confidence in the UN climate process, with countries at loggerheads on finance and other issues.

“We’ve seen geopolitical tensions washing through these halls,” UN climate head Simon Stiell told delegates yesterday. “We simply cannot afford to reopen previous decisions, to renegotiate existing targets, or to backslide.”

Signs of green policy backsliding have prompted Opec to raise its hopes for long-term oil demand, as I highlight below. Is the exporters’ club getting carried away?

Exploring Opec’s 2050 vision

I like to consider myself an optimistic type, but I’ve got nothing on the analysts at Opec.

The group of oil-exporting nations yesterday published a report projecting the shape of energy demand through to the middle of this century. It comes as rising electric vehicle sales shake up the outlook for road transport, the biggest source of oil demand. The Strait of Hormuz crisis has further heightened efforts to reduce exposure to volatile oil and gas markets.

But according to Opec, the next quarter-century will be a golden age for global oil producers. Oil demand is set to rise strongly to reach 124.1mn barrels per day, the report projects, up from 105.1mn bpd last year.

What makes them so bullish?

The report places heavy emphasis on signs of weakening momentum around international climate action. “It has become clear that previously adopted policies related to emissions reductions were overly ambitious,” it states. “In some cases, regions have witnessed complete U-turns.”

That’s a fair description of the shift in the US under Donald Trump; meanwhile, the EU is coming under pressure to rethink its own climate strategy, and has already softened its emissions targets for road transport (albeit pretty modestly, compared with the US policy reversal).

But the report pays little attention to the technological advances that have driven up the performance of electric vehicles, and pushed down their cost — enabling them to keep gaining market share despite the pressure on global climate co-operation.

Sales of electric cars grew by 20 per cent last year to more than 20mn, a quarter of all cars sold, according to a recent report by the International Energy Agency. It projects EV sales will keep growing at a much faster rate than the overall global car market, which grew at a mere 3.5 per cent last year, according to the European Automobile Manufacturers’ Association. Global sales of combustion engine cars have been in decline since 2017, according to BloombergNEF.

As I’ve written before, the remorseless logic of compound growth tells us that, as long as electric vehicle sales continue to rise at a faster pace than the wider market, they’ll eventually eliminate combustion engines from the car market altogether.

Consider China, where plug-in cars — which keep getting cheaper and more attractive than combustion-engine models — accounted for a record 62.9 per cent of new passenger cars sold last month, according to the China Passenger Car Association. Yet in 2050, Opec asks us to believe, “alternative-fuel” models will still account for less than half the vehicles on Chinese roads.

The biggest source of oil demand growth, Opec reckons, will come from developing nations whose energy demand is set to surge over the next few decades. EVs still make up a relatively small share of car sales in these markets — but they’ve seen some of the fastest recent growth. In the first quarter of this year, electric car sales rose by 80 per cent in Asia-Pacific countries excluding China, and by 75 per cent in Latin America.

Opec predicts that India’s oil demand will grow 145 per cent by 2050 — but as my colleague Chris Kay reports today, expectations of EV growth are rising there too, driven partly by the impact of the recent oil market chaos. And while Opec emphasises the fact that fuel-guzzling commercial trucks are going electric at a slower pace than passenger cars, battery power is also picking up in that sector, as I wrote this week.

Other areas of oil demand are likely to prove more robust. Demand from aviation is set to rise with the expanding middle class in developing nations, and the pathway to decarbonising the shipping sector remains far from clear. There’s no sign of a decline in hydrocarbon requirements from the petrochemicals industry, which consumes about 15 per cent of the oil sold each year, Opec estimates.

Yet these other markets may prove insufficient to offset a decline in sales for road transport, which accounts for nearly half of all oil demand. In its last annual oil outlook, the International Energy Agency forecast that aggregate global oil demand would plateau in the next few years and decline slightly in 2030.

A longer-term decline in demand would raise questions about the future of Opec itself. If members lose confidence in the outlook, they may prove unwilling to abide by the club’s rules on production limits, instead aiming to maximise sales while buyers’ appetite remains, and avoid being stuck with stranded assets.

The United Arab Emirates’ recent departure from Opec could be a hint of things to come, as the University of Oxford’s Adi Imsirovic noted. “The hitherto steady and reliable demand for oil is slowing and becoming less reliable,” he wrote. “The bigger risk is not falling prices, but leaving oil in the ground that may never be sold.”

Despite the public show of confidence in the world’s long-term oil appetite, Opec’s remaining members would be wise to have contingency plans at the ready.

Smart reads