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Thirst for oil returns in wealthy nations

Gas pump
Athit Perawongmetha | Reuters

A decade's worth of efforts to cut oil consumption in industrialised countries is at risk of being reversed, as low fuel prices boost demand and send motorists flocking back to larger gas-guzzling cars.

Figures from the International Energy Agency and other forecasters show OECD oil demand, which declined between 2005 and 2014, has been growing rapidly for the last three years after oil prices crashed from above $100 a barrel to about $55 today.

If the trend continues, roughly 62 per cent of the reduction in OECD oil consumption since 2008 will have been reversed by the end of next year, despite governments targeting fuel efficiency, alleviating air pollution and cutting reliance on foreign crude.

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Robust oil use in the developed world, which for years had been expected to decline, just as emerging markets consume more, has cast uncertainty around when global demand will peak. Some energy companies, including Royal Dutch Shell, had warned this could happen as soon as next decade.

"This period of lower oil prices has slowed the energy transition, no doubt about it," said Cuneyt Kazokoglu, head of oil demand at energy consultancy FGE.

"If crude stays around today's [price] level the structural demand decline that everyone is expecting will be pushed further out."

The oil demand turnround has been marked. Oil use in the OECD peaked at 50.4m barrels a day in 2005 before falling by almost 10 per cent up to 2014 as higher prices crimped consumption.

Since then demand in these wealthier countries has expanded at an average annual pace of about 400,000 b/d, IEA data show, and it is forecast to reach 47.4m b/d next year. This is approaching a level seen a decade ago, before an oil spike to a record level near $150 a barrel led governments to prioritise fuel efficiency.

Michael Cohen, an energy analyst at Barclays in New York, said while demand was growing alongside a broader economic pick-up in North America and Europe, lower prices had played the biggest role in the shift by influencing consumer behaviour.

"The steady improvement we were seeing for a number of years in average vehicle fuel efficiency has largely stopped," Mr Cohen said.

"While not every motorist is buying a SUV (sport utility vehicle) they're certainly not choosing the super-efficient vehicles they may have picked when oil was above $100 a barrel."

While global emissions have flatlined, led by the US because of coal-to-gas switching, rising oil usage could pose a potential threat to this trend.

The rise of electric cars and hybrids, from Tesla's Model X to the Toyota Prius, have generated headlines for their potential to overhaul the relationship between motor cars and oil use. But many analysts say it is overshadowing today's reality.

FGE says that in the first half of 2017 for every new electric car that came on to the road in the US, Americans bought 60 new fuel-hungry SUVs. In China the ratio was 30 new SUVs to every electric car, and 25 in Europe.

In 2009 BP's then chief executive, Tony Hayward, forecast US gasoline demand would never again top the level seen the previous year before prices hit almost $150. But this August the US energy department estimated it had reached a new record of 9.9m b/d.

For oil producers and refiners, stronger demand has been a boon.

Total demand growth, which includes the more than 1m b/d of annual consumption increases seen from emerging markets, have helped the Opec oil cartel and allies such as Russia in their efforts to tighten up oil supplies.

US shale output, which propelled the 2014 crash, again threatened to swamp the market in early 2017, but international crude prices have since stabilised above $50 a barrel — a move many analysts attribute to evidence of growing consumption.

Oil refineries, rushing to turn the crude glut into higher demand for fuels, have seen profit margins rise.

Some environmental groups say governments should have used the period of lower crude prices to introduce higher retail taxes at the pump to combat the negative effects of rising oil use.

Others are relatively sanguine, arguing that the rebound is likely just a blip given other longer term trends.

Charlie Kronick, senior campaigner at Greenpeace, said a push by big Asian consumers in China and India to ban petrol and diesel cars would do more than any western policy to "tilt the global marketplace in favour of electric vehicles".

"The real issue isn't what happens in 2018, but what happens in the decades after 2020," said Mr Kronick.

But for an energy industry still adapting to the end of the $100 oil era, some analysts warn they cannot be complacent or ignore the significant shift in OECD consumption and its implications today, including the eventual need for more supply.

"The problem with the oil market right now is that while it seems to want to trade the next decade's potential slowdown in demand, it is ignoring the fundamental reality that exists today," said London-based consultancy Energy Aspects.

"Investors remain transfixed by an as-yet unrealised energy revolution."

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