The outlook for crude: a thought experiment

June 2016 | Bram Smeets, Angelos Platanias


As the last 12 months have demonstrated, the energy sector is highly susceptible to market forces. Changes in GDP growth, further instability in oil prices, and an acceleration in the adoption of new technologies could all impact the outlook for the industry long-term.

At a macro level, energy demand growth to 2050 looks set to decelerate to around 0.7% per year, driven by structural shifts in population, industry focus and energy efficiency.

As we drill down to individual sectors however, the chemicals industry looks set to buck this sluggish trend, growing at around double the rate of the rest of total demand – an increase of 1.8% during the time period to 2035.

So where is chemicals demand coming from – and can it be relied on to prop up the broader market for liquids long-term?

The outlook for liquids demand

Chemicals will drive around 65% of liquids demand growth through to 2035, with petrochemical feedstock for light end products responsible for around 70% of this growth.

Chemicals aside, however, overall demand for liquids looks set to peak and flatten by 2025, as a result of changes to light vehicles. Our latest automotive consensus scenario suggests that by 2030, electric-powered vehicles could represent close to 50% of new cars sold in the US, EU and China, and around 30% globally.

With autonomous vehicle adoption and car sharing also growing, it’s likely we’ll see a decline in liquids demand for light vehicles by 2.3% to 2035, and a further 2% thereafter to 2050.

Combined, the forecasts make bleak reading for crude suppliers. The feedstock products that are set to be the most valuable source of chemicals demand aren’t typically produced using crude, and as light vehicles move to electric, and the power sector shifts from fossil fuels to renewables, we could be looking at the very real possibility of a peak in oil demand.

But what if it’s not business as usual?

As the last 12 months have demonstrated, the energy sector is highly susceptible to market forces – our own, and mainstream base case projections place overall long-term demand at around 30% lower than during the same period in 2015.

Changes in GDP growth, further instability in oil prices, and an acceleration in the adoption of new technologies could all impact the outlook for the industry long-term.

So what could change look like?

Two very real possibilities could impact on the chemicals sector alone; an improvement in plastics recycling and plastic packaging efficiency.

An increase from 8% to 20% in plastic recycling, alongside a decline of 5% in the use of plastic packaging, could see the demand for liquid hydrocarbons fall by around 2.5 million barrels per day below our current business-as-usual case.

If the market penetration of electric, autonomous and shared vehicles rises to 50% globally (and not just in the US, EU and China), and the number of autonomous vehicles as a percentage of new cars sold rises to 69% from the current projected 41%, we could see a further depletion of three million barrels per day by 2035.

The material implications for investments

Should these scenarios play out, the overall result would be a peak in oil demand by 2025, at fewer than 100 million barrels per day.

Hypotheticals aside, any downgrading of the outlook for energy demand has material implications for investment, including decisions being made in 2016.

Taking oil alone, the difference between our business-as-usual case and the IEA Current Policies case suggests that daily production would be nine million barrels lower in 2030 – meaning a cumulative USD 800 billion of investment could potentially be foregone or stranded.

These short to medium term changes will bring opportunities as well as threats to the market – and it’s critical that industry players prepare by identifying the most appropriate business models to exploit pockets of growth and capture value.

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About the authors

Bram Smeets is a manager with Energy Insights in McKinsey's Amsterdam office and Angelos Platanias is a senior analyst with Energy Insights in McKinsey's London office.