Sulphur 390 Sept-Oct 2020
30 September 2020
Is this Peak Oil?
“The prospects for future oil demand start to look far more pessimistic”
Do you remember Peak Oil? This was the theory, driven by research originally conducted by petroleum geologist M.K. Hubbert in the 1950s, that oil production inevitably followed a bell curve, with supply eventually peaking as easier reserves were exhausted, leading to an inflexion point in production and a long tailing off. Originally Hubbert was talking solely about US oil production, and he seemed to have been borne out by the evidence. But a lack of discoveries of new large fields in the 1990s led to a revision of the theory that predicted a global production peak in 2005-6, potentially leading to rapidly rising oil prices until demand destruction occurred.
Of course, as we now know, advances in technology for unconventional oil extraction, especially tight oil, have upended all of those doom and gloom predictions, and the world now has more oil than it knows what to do with. Peak Peak Oil concern was probably somewhere in the period 2000-2005. So instead, over the past decade and a half, Peak Oil predictions have drifted away from the supply side of the equation and began to focus instead on the demand side. As the cost of renewable power falls and installations become more widespread, and there is an increasing take-up in electric- or hybrid-powered vehicles, together with fuel efficiencies and ageing populations who are less mobile, so, the theory runs, we will instead see peak oil production by default, as demand instead peaks and then begins to ebb away, and so prices fall and supply contracts with it. This would of course have major implications for the world’s sulphur production, given that nearly 50% of it comes from the extraction of sulphur compounds from oil at refineries.
Until very recently, predictions for peak oil demand clustered around the medium- to long-term future; somewhere around 2030 or 2040, perhaps, once electric vehicles had started to make a significant impact on the demand for transportation fuels. But the Covid-19 pandemic has upset a lot of predictions this year, and as the shape of a world dealing with the virus on a longer term basis starts to become clear, so the prospects for future oil demand start to look far more pessimistic. The International Energy Agency (IEA) last month predicted 2020 oil demand would be down 8.1 million bbl/d on 2019. OPEC puts it at 9.1 million bbl/d down, and the prospects for a major recovery in 2021 seem to be fading. The most recent figures for oil consumption show that demand remains weak, and refining margins are low. US refinery utilisation rates fell from 93% at the start of the year to 67% in April, and even now are only at around 75%. Oil prices have slid below $40/bbl at the end of August, an unsustainable level for most OPEC producers, who rely on oil revenues to balance their books. OPEC cut output by 9.7 million bbl/d in April, albeit with a gradual slacking off of this as demand was expected to return, but in its absence it may find it needs to cut again.
Some of this, no doubt, is short term. But optimistic hopes of a vaccine have met a colder reality, and in the northern hemisphere winter may well bring a second surge in cases. Even now, air travel is down 40%, but avgas consumption is down more than 50%, as far fewer people are willing to risk long haul flights. The passenger ship market is at a standstill. And in Europe and North America people are commuting less. The longer that the pandemic persists, the more likely it is that it leads to permanent changes in behaviour. The move to home working and teleconferencing that has been forced by lockdowns will see some companies continue to operate that way after restrictions are lifted.
Bigger changes like protectionism and resource nationalism, and a general backlash against globalisation already present before the pandemic, but exacerbated by it, may also play a part. Likewise the weakening in Chinese growth that was already a feature of the world economy prior to 2020. And efficiency gains are also working to reduce demand − US oil demand peaked in 2005, and in spite of 10% more vehicle miles per year being travelled since then, efficiency savings mean overall consumption has continued to fall.
In 2007, OPEC predicted that global oil consumption would reach 118 million bbl/d in 2030. By 2019, however, it had revised this down to 108 million bbl/d. And with consumption for 2020 now forecast at only 91 million bbl/d, there seems an increasing chance that 2019’s demand figure of 99.7 million bbl/d may be the highest that it ever reaches – that was the conclusion of a DNV GL report published just this week. Lower oil consumption of course means lower sulphur production. And even if there is a return to 100 million bbl/d, a surplus supply of oil may mean less of a premium (and so higher utilisation) for sweeter grades, and hence lower sulphur output even if demand does return. Perhaps the upside for sulphur in such a scenario is that a reduction in supply may at least make it more valuable.
