13th November 2018
Looking out to 2040, IHS Markit expect Global energy demand to continue to increase in line with Global economic growth, which will be driven by a burgeoning population, and by economic expansion in the Eastern Hemisphere. Policy and consumer choices in developing Asia will determine the future growth path of energy – particularly in China and India, Asia’s two largest markets.
To model future Global Energy Mix, IHS Markit utilizes Global energy scenarios, which variously anticipate moderate to strong Global economic growth, but which differ widely with respect to other key market and geopolitical assumptions.
Conceivably through to the end of the next decade there may occur a period of intense competition for energy market share—a grand “energy rivalry” across the energy value chain. In this instance suppliers of Oil, Gas, Coal, Nuclear, and Renewable energy will compete to preserve traditional markets or dethrone incumbents. Notwithstanding this “energy rivalry” theme, environmental concerns are expected to play an increasingly prominent role, with growth of Renewable energy being supported due to efforts to reduce pollution and address climate change. Shifts in governmental policy and consumer behavior, in tandem with enhanced global co-operation and integration on environmental matters, could be significant and impactful.
Accordingly, our predictions of global hydrocarbon liquids demand out to 2040 differ markedly between our energy scenarios, by as much as 23 MMb/d by 2040. This is a significant variation compared to current day 100 MMb/d demand levels. Concern for the environment and significant and widespread efforts to comply with the Paris agreement could see oil demand peaking as soon as the next decade, and then falling sharply thereafter. However, if economic expansion occurs without related environmental co-operation between nations and governments, this could result in oil demand peaking later, in the 2030s, and declining more slowly.
In the last 5 years or so investors in upstream supply generally have favored short cycle projects. US onshore production has grown at record levels, driven by significant investment in unconventionals. Conversely, investment in conventional E&P globally has fallen out of fashion; overall, global upstream spending fell by 31% between 2014-2016. Low levels of conventional upstream investment risk an acceleration of field decline rates and coupled with the recent slow pace of project sanctioning this could contribute to a global oil supply squeeze by the mid to late 2020s. A consequence of investment short-termism in the oil sector may be setting the ground for another boom-bust cycle in the next decade.
Nonetheless, in each of our scenarios, we see that a viable and large-scale oil industry—upstream and downstream—is still needed for decades to come; oil will remain a large component of world energy supply and demand. Producing and selling oil will still be a big business.
There now exist many enablers of change in the automotive industrial ecosystem, notably policy, technology, and societal change. Fuel economy standards and fuel efficiency could potentially have a bigger impact on oil demand than the growth in electric vehicle sales.
Towards 2040, Power is expected to be the fastest growing contributor to the energy business. The outlook for total power generation is strong in all scenarios, reflecting increased electrification rates in developing countries and greater penetration of electricity use across all economies.
Gas will be a growing force in the future energy mix given its role as a primary source of power generation, a backup to intermittent renewables, or a feedstock. Gas is viewed by some parties as a fuel which can help transition from liquid hydrocarbons and coal, towards lower carbon options, particularly for power generation. Gas demand looks set to grow strongly outside the OECD and CIS, but particularly in Asia, where many countries are considering LNG as an option where national geography, infrastructure and other factors are favorable. However, whilst investment in global gas may offer growth opportunities, identifying where to invest and make good returns is a critical challenge for companies and investors, given an increasingly complex supply chain.
Coal will remain a key source of new power generation in developing Asia and parts of Africa over the next few decades but will recede globally in the face of growing gas and renewable-sourced power. China may accelerate the switching from coal to gas to address air quality concerns.
Renewable energy technologies have expanded globally to account for approaching 2% market share of the world’s primary energy usage. The renewables cost base is reducing faster than many expected a few years ago, due to the adoption of artificial intelligence (AI) and digitalization to improve manufacturing and operations efficiencies. Other technologies such as smart contracts have contributed to lower financing, client acquisition and transaction costs. The cost base for battery technology (an enabler for both renewables and electric vehicles) and related manufacturing is on a similar downward trend.
Ian Conway: Executive Director, Upstream Research & Consulting, IHS Markit
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