Peak Oil Demand

April, 24, 2020

The Bail-in

As yet another week dominated by concerns about COVID-19 comes to a close, we hope that you and your loved ones are well.

As you know, during this time of transition, we are monitoring a number of factors. On a macro level, we believe that COVID-19 is functioning as a catalyst in the transition to a technology enabled new normal. The recent crash in crude oil prices following the COVID-19 slowdown begs the question, “Has peak oil demand finally arrived?”

Looking back, in 2019, the vast majority of crude oil was processed into fuels for the global transportation sector. Global oil demand has actually been rising at a progressively slower pace in recent years. Over the last two decades, increased demand from rapidly growing emerging markets countries has been offset by improved mileage efficiencies, and government programs targeting the adoption of zero or low emission cars. China and Europe collectively, with more than half of global sales, expect that 40% of all new cars sold will be hybrid or electric by 2030.

Although global demand for oil was 100 million bpd in 2019, 15% above 2010, and was expected to grow another 1% in 2020, demand plummeted in the wake of the governments’ “stay at home” edicts. US and Chinese oil demands have fallen by about one third. 

The timing could not have been worse for oil dependent economies. Nearly simultaneously to the emergence of COVID-19 recession, Saudi Arabia raised its production after failing to reach an agreement with Russia to reduce supplies. Although an agreement was reached following a sharp decline in the price of oil, economic disruption continues. The excess supplies produced will soon fill all of the world’s land based and floating oil storage. When storage in the southwest was filled, owners of West Texas Oil faced the unimaginable situation of paying buyers as much as $37 per barrel to take it off their hands.

What can we expect in the post COVID-19 environment? “Shelter in place” orders have produced a fundamental shift in the way people work. At distance work became the norm almost overnight by necessity. While studies showed that 34% of employees could work at home full time, only 5% were doing so at the end of 2019. The savings in commuting time, freedom to work at one’s own pace and more family time were the collateral benefits for many. We would not be surprised to see full time work from home increase by 10% to 20% and part time at home work increase by 5% to 10% post COVID-19 

Working from home together with more internet shopping and home delivery services, at distance education and medical care are all poised to create a significant long-term reduction in fuel demand. Air travel may be slow to resume and could require the airlines to install HEPA filters to clean the recirculating air.

In summary, we expect that the changes instigated by governments’ stay at home orders brought peak oil demand forward to 2020, which could have significant political and economic effects. These changes may have long lasting negative effects on travel related sectors. By contrast, they have accelerated the adoption of at-distance technologies and the infrastructure that delivers them.

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