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Why weaning the world off oil remains hard

The outlook for global oil demand is mixed. The struggle to decarbonise the petrochemical sector poses challenges and opportunities.

By Adrian Murdoch

oil, climate change, energy security
A sea of blue barrels. Why can’t humans shift away from oil? (Image by photomaster via Shutterstock)
  • Global oil demand is expected to rise by 6% between 2022 and 2028 from 99.8m barrels per day to a peak of 105.7m barrels per day.
  • The UK’s stance on maximising North Sea oil reserves for energy security, reflects the tension between economic interests and environmental concerns.
  • The transition away from petrochemicals is complex, as they are deeply entrenched in daily activities and challenging to decarbonise with current technologies.

The most recent report on the demand for global oil from the Paris-based International Energy Agency was, at best, mixed.

First the good news. Growth in the demand for oil is set to slow almost to a halt in the coming years, with the high prices and security of supply concerns highlighted by the global energy crisis hastening the shift towards cleaner energy technologies.

“The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade,” says IEA executive director Fatih Birol.

The report estimates that based on current government policies and market trends, global oil demand will rise by 6% between 2022 and 2028 from 99.8m barrels per day to a peak of 105.7m barrels per day [see chart].

The growth will be driven by petrochemicals.

But despite this cumulative increase, annual demand growth is expected to shrivel from 2.4m barrels per day this year to just 0.4m barrels per day by 2028.

The decline is being driven by the expansion of electric vehicles, the growth of biofuels and improving fuel economy which reduces consumption.

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A resurgence in investment

But it is not all good news. While demand might be on a downward trajectory, the IEA also reports that global upstream investment in oil and gas exploration, extraction and production is on course to reach its highest level since 2015, growing 11% year-on-year to $528bn by the end of 2023.

In a recent report on oil and gas megatrends, BMI, a unit of Fitch Solutions, pointed out that the rise of a more fragmented world with unsteady energy supply chains is expected “to support elevated domestic investment in energy infrastructure”.

The key beneficiary here, of course, is the oil and gas industry. And BMI points the finger of blame firmly at the war in Ukraine.

Although the abrupt supply shock sent prices soaring and “strengthened resolve” in some countries to diversify away from fossil fuels through greater use of renewable energy sources, it has also seen “a resurgence in domestic oil and gas investment for both profit and on energy security grounds risking climate targets”.

Certainly, investors have been keen to fund this expansion. As Capital Monitor reported at the end of July, the world’s top 30 asset managers have invested $3.5bn in bonds of 40 companies involved in fossil fuel expansion over the past 18 months. In January alone, BlackRock and Vanguard alone held $25.3bn in oil and gas bonds.

Nowhere can this “resource nationalism” be seen more clearly than in the UK.

In mid-July, energy minister Grant Shapps insisted that the government would “max out” the country’s remaining reserves of North Sea oil and gas. A couple of weeks later, Prime Minister Rishi Sunak granted hundreds of new oil and gas licences there as part of a drive to make Britain more energy independent.

“Now more than ever, it’s vital that we bolster our energy security and capitalise on that independence to deliver more affordable, clean energy to British homes and businesses,” he said.

The North Sea Transition Authority (NSTA) regulator expects the first of the new licences to be awarded within the next couple of months.

The heart of the decision lies in energy security. “The UK must produce as much of our required supply as possible here, with full control over the regulatory environment in which it is extracted, protecting and creating high-value jobs,” said Russell Borthwick, chief executive of Aberdeen & Grampian Chamber of Commerce.

Building blocks

Political posturing to one side – the British approach to climate change is driven by election strategy rather than evidence – the difficulty of the move away from petrochemicals should not underestimated.

They are, as ING’s Coco Zhang, ESG researcher, Gerben Hieminga, senior sector economist, and Teise Stellema, energy transition research assistant, pointed out in a paper in mid-July not only the “building blocks supporting our day-to-day activities,” they are also hard-to-abate with “currently commercially available technologies”.

They cite numerous potential decarbonisation pathways that should be explored.

Some are already used but should be explored in more detail. These include using biobased feedstock to replace fossil feedstock in the production of petrochemicals and a greater focus on the technology behind plastic recycling which the researchers highlight as an area that has been ignored.

They also mention steam cracking – the process of breaking down saturated hydrocarbons such as naphtha, butane, propane and ethane to less saturated ones like ethylene and propylene – which has become the target of petrochemical companies in their quest to reduce emissions; clean hydrogen which can be used in petrochemical production either as a fuel for combustion during the steam cracking processes or as a feedstock for synthetic petrochemical products such as methanol; and carbon capture and storage which is gaining attention from petrochemical companies as a technology to reduce emissions from petrochemical production.

The problem is the money. All the decarbonisation pathways need what ING calls “significant investment” to support the scale-up of relevant technologies.

Incentives and restrictions are in place among many governments to accelerate the decarbonisation of the petrochemicals sector. The report applauds the efforts from the EU and the US that show that policymakers are serious about tackling the environmental challenges associated with the petrochemicals sector.

“But more is needed to spur investment to the level outlined by the UN and to ensure a long-term structural change towards sustainable petrochemical production,” they say.

The global oil industry is at a crossroads. While the shift towards cleaner technologies looks promising, geopolitical dynamics mean that investments in fossil fuels show no sign of slowing down. For any meaningful progress, policy makers must facilitate investment in sustainable alternatives and not be distracted by short-term political gain.

[Read more: Asset managers continue to fund fossil fuel expansion]

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