Oil and gas in the capitals

They forecast hard times for oil-producing countries in general, and the Middle Eastern ones in particular. They predict declining oil demand for various reasons. They claim heavy penetration of electric vehicles will reduce oil demand significantly and permanently. As a result, oil demand will decline, along with oil prices and revenues.

Nonsense! In fact, these forecasts are coming from certain groups with agendas that strictly wish oil would disappear overnight.

Here are some facts. It will take more than 700 million electric vehicles on the road by 2050 to keep global oil demand at the 2019 level: 100 MMbpd. That means global oil demand will continue to grow in the coming few decades. Doomsday forecasts for oil producers ignore several facts. For one, to produce 100 MMbpd by 2050, all of that output has to be new oil because of field declines!

Even if we take their flawed view, that global oil demand will decline, and we take the extreme case of 75 MMbpd by 2050, even that 75 MMbpd has to come from new oil that must be found! Trillions of dollars of investment are needed to produce that amount then. Only higher oil prices and revenues can make these investments take place.

Lower demand growth, or an actual decline in demand for oil, does not necessarily mean low oil prices. It could lead to the opposite: high oil prices at a time when there is nothing to shift to and there are no alternatives! A sharp
decline in demand lowers prices. Low prices force high-cost producers out of the market. Prices then rise…and low-cost oil producers in the Middle East would enjoy great profit margins for years to come!

While consumers’ taste is changing toward electric vehicles, a larger and overwhelming global trend has been taking place: the move from small cars and sedans to SUVs and light trucks. The U.S. leads in the trend, followed by China. That makes EV penetration harder than otherwise, despite the variety of electric SUVs and light trucks that are coming online in future years. Regardless, the fact now is that the prices of electric vehicles remain high, when compared to the same ICE vehicles, something the U.S. federal government highlighted in several of its reports on the lack of adoption by government agencies.

Oil demand trap. For the major oil-producing countries, worries about the impact of electric vehicles could be delayed in the face of an immediate and lasting crisis: the oil demand trap!

By definition, an oil demand trap reflects the demand that is not influenced by oil prices nor incomes. For example, some of the demand for gasoline will not recover, if we lower gasoline prices or give additional income to consumers. Similarly, part of the global air travel will not recover, even if tickets are cheap or the various governments give people additional income. Fear of infection trumps prices and incomes, and “traps” oil demand.

Now add “work from home”! A large number of companies are either eliminating their offices entirely or allowing a large percentage of their employees to work from home. Such a move will permanently reduce traffic and reduce the demand for petroleum products. It remains to be seen how “work from home” is going to affect the demand for electric vehicles in the coming years.

While no one can deny that working from home has its own disadvantages, the trend is pretty clear: companies are moving toward remote working. Companies can reduce costs substantially by eliminating their offices or reducing their sizes. While “productivity” is still debatable, many companies saw productivity skyrocket. In addition, no time is wasted in traffic.

Based on data from the U.S. Census Bureau, the average working American spent 225 hours per year commuting to work in his/her own vehicle. That is 28 8-hour working days!

Chris Herd, founder of First Base HQ, a company that specializes in the infrastructure of remote working, wrote a thread on Twitter, discussing the work-from-home trends. According to his research, employees will work from home two to four days per week, and they will come to the office one to two days per week. This allows companies to cut their commercial office space by 50% to 70%. Some companies, according to Herd, are thinking about creating resort-like compounds, where work happens in person. This also eliminates commuting and reduces fuel demand.

Commuting to work, whether via public transportation, carpooling, or using private vehicles, uses fuel. But the highest fuel consumption, per worker, comes from people driving their own cars to work. According to a survey by Citi, 77% of people in the U.S. drive their own cars to work.

The U.S. Census Bureau estimates that 128 million employees commuted to work, using an automobile or other vehicle. Assuming that 77% of them used their own cars, with a consumption of 11 bbls of fuel per car, per year, and general information about automobile usage, we can calculate that if 50% of workers in the U.S. work remotely, the demand for fuel declines by about 1.5 MMbopd in the U.S. Globally, this might add up to a 4-MMbopd decline in fuel demand.

According to OPEC’s recent Oil Monthly Report, oil demand will average 96.1 MMbpd, globally, in 2021. This is lower than the average global oil demand in 2019 by about 3.8 MMbpd. If you
believe that working from home is here to stay, then the decline in fuel demand is permanent! Returning to 100 MMbopd might take longer than expected.

About the Authors

Dr. Anas Alhajji

Contributing Editor

Dr. Anas Alhajji is an independent energy economist and the former chief economist at NGP Energy Capital management. He is a well-known researcher, author, speaker and an award-wining academician and wood worker.