Recently, BP released their annual energy outlook. In the 2020 edition, BP outlines three scenarios which explore different pathways for the global energy system through the year 2050.
In this episode, Stephen Jones, global head of oil products for Argus, and Michael Cohen, chief US economist and head of oil analysis at BP, discuss the 2020 energy outlook and how the pandemic has affected long term oil demand.
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- Learn more about Argus’ global oil products coverage
- Read the full BP Energy Outlook 2020
Stephen: Hello and welcome to "Driving Discussions." In this series, we'll discuss the forces that affect road fuels globally. In today's episode, we'll be discussing BP’s recent release of their annual Energy Outlook by reviewing three main scenarios which explore different pathways for the global energy system through the year 2050, and how the pandemic has affected oil demand in the long term. My name is Stephen Jones, and I'm the global leader for the oil products here at Argus Media. And with me today is Michael Cohen. He's the chief U.S. economist and head of the oil analysis at BP. So, welcome, Michael.
Michael: Thanks, Stephen. It's great to be here. And thank you very much for hosting me on your podcast today.
Stephen: Delighted to have you. I guess we'll jump right in the deep end here, the BP annual Energy Outlook is kind of an event unto itself every year. The market kind of looks to BP for its leadership in looking at the economic possibilities in our industry. And as such, this outlook is described as a set of scenarios. So even though one scenario could be called Business-as-usual case, the resulting outlook doesn't seem too that unusual in that respect. Are there any of the scenarios that you consider more likely than others? Or are we kind of embarking on a brave new normal, or business as usual, as it might be called?
Michael: So, we use this outlook to try to identify features that are common across all three scenarios, and in that pursuit are not really assigning any likelihood over any one of the others. And I think in that process of defining these scenarios, and looking at the results of them, we've highlighted that there are three main trends that sort of come about and the first one is that of electrification. So, in all of the scenarios, we see a heightened provision of energy supply that is from electricity. The second sort of characteristic from all of the scenarios is that renewable share grows in all three of them. And just for listeners, for background, there are three scenarios. One is called a Business-as-usual scenario, the other is called a Rapid scenario where we are getting to a well below two-degree pathway. And the final scenario is a Net Zero scenario where we get to net emissions of zero or close to zero by 2050.
So, these three scenarios that we defined, as I mentioned, three main trends. Number one, as I said, electrification, number two, renewables share is increasing in all of them. And the final one is that fossil fuels are playing a declining role in all of them. So even in that Business-as-usual share, in that scenario, we see the fossil fuel share getting down to something like 20pc versus a decline of 65pc in that Net Zero scenario. And in all of these scenarios, the overall level of absolute demand for fossil fuels is lower in 2050 compared to today. And the other way that we think about these scenarios is to try to understand just how the system might change over the next 20 to 30 years. And I should mention that we've been very clear that all of these scenarios will and could be wrong. But I think it's important to do the exercise to try to understand what the bounds of the system are, and also to help inform our strategy and other market participants' and other industry players' strategy.
And so, the first thing that I would highlight, number one, in terms of the energy system is that we think it's gonna be more customer-oriented. There's a great chart in our report that just shows how there's gonna be a much greater diversity of fuels, especially in the 2020 to 2035 timeframe, than what we've ever seen in the past. And that's going to be more preferential for customers, rather than upstream producers that are dominating by producing either coal in the early part of the 20th century, and then oil. And so, in the future with more types of energy that are meeting demand, customers have more power in that world and there's greater competition in that world than what we've seen in the past. So, in that sense, it is a brave new normal and I think it's an exciting time for companies like ours, and it's a challenging time for forecasters.
Stephen: That's a great overview, Michael. And those three components, electrification, renewables, and fossil fuel combinations, obviously, are all contributing to quite a wide range of these potential outcomes. But when we kind of look at outlooks over the past years that BP has offered up, they used to show, oftentimes, demand growth slowing or slowly rising at least in one of the cases. In this year's set of scenarios, it seems that there's no longer any growth in any one of the given scenarios. Is that, I guess, predicated mostly on customer preference, as you were alluding to, as opposed to just a supply-driven marketplace, or are there some other characteristics that stand out as to the shift, you might say, between all scenarios now showing peak demand pretty much being behind us?
Michael: So, I think it's important to understand that we're living through a pretty monumental shift in our lives and our economy, and from a whole host of different perspectives, this is a major shock to the system. And so, I think it's important to understand that this outlook is one of the first outlooks to have been released in the aftermath of the pandemic by any forecaster. And so, comparisons, we really need to be doing apples to apples to look at things that were released by other forecasting agencies or even other companies, because it's really chartering new territory, what we're living through.
First off, when we think about the effects of coronavirus, there's a broad impact to the economy that we've had to take into account, a reduction in GDP growth that is not just something that we believe is temporary, but something that lasts long-term. And let's be realistic and understand that the losses, the job losses, the bankruptcies that we're seeing, the change in behaviors from working from home, reduction in travel, and the concern about getting back on to airplanes and going to conferences and all of these things while we...some of these things are going to bounce back. It is important to understand that countries, especially in the Middle East and in developing countries, are gonna see a permanent impact from this in terms of lower remittances, contraction in tourism, revenues, contraction, obviously, in oil revenues, and this will have a domino effect on those economies and on trade and on the global, on the economy as a whole.
So, the GDP impact is important, and we can talk more about that later on. I think it's also important to understand just in terms of the expectation around peaking that we're dealing with more stringent efficiency measures than we've seen in the past, especially in Europe. And then we've also undertaken a review of some of our modeling for China and also for the truck sector. And in both of those cases, it's resulted in a lower demand profile than what we published in the past.
Stephen: Excellent. Okay. That certainly puts it in context. And it kind of leads to the question I was gonna ask about, has the pandemic had an impact on or influence over this long-term outlook, which I think you pretty much addressed that it essentially has. But is, in your opinion, and based on all the modeling, are these course changes irreversible for demand or are there potentials for surprise to the upside or are all the components that are contributing to the rate of slowing demand growth pretty much irreversible in that sense?
Michael: Okay, so, by and large, no. In our view, the profile for energy demand doesn't really rebound with the exception of the BAU scenario. And I think the broader GDP effect is something, like, 2.5pc by 2025, rising up to about 3.5pc by 2050. And energy demand is falling by about that same percentage. And obviously, the biggest and most pronounced impact is on oil demand, which sees oil demand coming down about 3 million barrels a day by 2025 and about 2 million barrels a day by 2050. And I do think that there is still some areas of the world, especially in emerging economies, where you are still gonna see an increase in oil demand growth, mostly in China, India and other developing Asian markets. So, by 2035, compared to where we are today, they're almost 10 million barrels a day higher, so consuming 10 million barrels a day more oil than in BAU than today. And so, the developed economies, though, it's...even in that best-case scenario, they're still declining by about 1pc per year.
But I think it's important to understand that, of course, there are upside risks to oil demand in the near term. And much of the outlook revolves around assumptions around efficiency savings, especially in the shorter term. And obviously, if we get a situation where people can no longer...well, I shouldn't say "people," but more like governments are no longer as willing to spur forward policy to ensure that people are buying more efficient cars, that's gonna set back the process. So, obviously, charging infrastructure is another barrier, consumer acceptance, petchem recycling, these are all risks to the upside if those assumptions are not borne out.
Stephen: So, I guess, on the regionalization, if you will, of demand support, you mentioned that obviously some areas will continue to grow and perhaps be offset by the more mature markets. Do any stand out in particular in that regard? Are we gonna see disparities in terms of who's carrying the costs burden for the broader transition and the efficiency gains that are being sought?
Michael: So, yeah, I mean, I think, at the outset, the way that the vehicle stock is set up with more of the vehicle stock globally centered in developed economies, the sort of rate of scrappage and the slices of new vehicles, you're gonna have different layers of net effects in developed versus developing economies. But I think the important thing to focus on in this regard in terms of who's bearing the cost or how do we see this evolving is that the carbon price is the primary way in which we are modeling the effect of decarbonization across all different energy sectors.
And in that BAU scenario, the level of carbon prices is pretty low, but in the Rapid and Net Zero scenarios, the carbon price increases pretty rapidly and then converges towards the end of the outlook, but you're gonna have to have some sort of border adjustment type of policy that needs to be in place to sort of avoid that carbon leakage such that developed economies should not be paying the most, and they'll need to be some other policies on a global scale to try to harmonize the decarbonization process that's going forward and enhance the likelihood of acceptance of those higher prices. Obviously, in developed economies, we'll be able to bear a higher price, and that's why the profiles look different in developed economies versus developing economies for that carbon price.
Stephen: That's an interesting point, I guess, from the standpoint of developing economies can't afford it, but should they necessarily have to afford it. But if we back up a bit, if carbon price is kind of the key modeling effect of how the world decarbonizes, and it's a consumer-driven set of scenarios, does that mean the consumer is agreeing on a carbon price? Or is it really regulatorily, policy-driven, carbon-managed metrics that set the carbon values and perhaps, for that matter, even disparities or lumpiness between different regions' acceptance of a carbon price?
Michael: Yeah. So, in terms of how the carbon price is actually borne out in reality, there are cases where this is implicit, and there are cases where it's explicit. But overall, we're assuming that the carbon price is a way in which that externality of emissions is priced across the different energy sectors. And in some cases, carbon prices, I would say arguably, in most cases, carbon prices alone are not the solution to removing carbon and to reducing the carbon intensity of these economies, we have to see other policies in place in order to get that to occur. Not sure if that's answering your question, Stephen, or if it's something similar.
Stephen: Yeah, I think it does, actually. The fact is that carbon price and how it finds an equilibrium in a market will be how the market views the demand and impact and the value of the energy for which it creates the carbon, right?
Michael: Sure. And I think we have to acknowledge that the, in some cases, second-best alternatives to carbon prices, there's obviously a lot of political resistance to carbon pricing, we understand and acknowledge that. And it's important to take that into account when we think about what is likely to happen in reality, and also how companies like ours are positioning and advocating for a better emissions profile and a less carbon-intensive world.
Stephen: Yeah, and this is a good point. I think everyone accepts the fact that the world desires to decarbonize to a large extent and therefore has to have the motive to do so. And carbon value needs to be somewhat equitable so that the world can achieve that, that direct mechanism. But the question, I guess, ultimately, for those directly involved in industry, is, does peak demand and the decarbonization mean kind of the end of the petroleum markets as we know it, or how would you put, in the range of scenarios, the level of importance for conventional oil markets as we know them today?
Michael: Yeah. So, I mean, look, I would say a couple things. First of all, markets are always evolving. Argus, I'm sure is very aware in terms of the number of different prices that you're having to track. So, it shouldn't be a surprise at all that the things that people are paying attention to change over time. And I think the same will be the case with energy markets. So, with that in mind, I don't think we're saying at all that oil is going to become less important.
We're also saying that these are scenarios and, in these scenarios, it seems to be the case that oil and fossil fuels play a less dominant role in the future than it may be playing right now. And I think the third point I would make is that there's some slides in our presentation that just talk about the decline rates of existing supply. And the profile of those decline rates of existing supply is still quicker in two of the three scenarios than the decline in demand, which means that, especially in the near term, out to the 2035 timeframe, there's still hundreds of billions of dollars of investment that are needed in order to just maintain and fill that gap between supply and demand.
Now, when you get into a Net Zero scenario, you start to see those lines cross towards the end of the outlook. And that implies that there will be some questions around the economic viability of future investments if that is the scenario that we find ourselves in.
Stephen: So, does that, in essence, suggest that oil is not the new tobacco? In other words, it's not just all bad and poor investor sentiment, we truly do need to continue to replace the resource, even with peak demand looming, to continue to provide the energy the market requires for the foreseeable future. Is that pretty much the case or?
Michael: Well, I think going forward, there are gonna be different things that the world will demand of all producers and governments. And I would say that, over time, there are things like the carbon intensity of fuels that will matter more so than maybe right now. And I think that the attention on flaring, that we've taken a very active role ensuring that we reduce our methane emissions, other companies and other producers will have to do the same. And I think that where we make very clear that one of our aims is to ensure that the rest of the world can reduce emissions and can get to a net-zero path.
So I think, obviously, oil still plays a role. But I think that consumers will begin to demand more, a higher level of stewardship around those resources in the way that they're produced and consumed and transported.
Stephen: So, I guess walking briefly through the whole supply chain, if we start at the upstream, the carbon intensity of oil is pretty heavy, obviously. Is natural gas a key component in the scenarios for transition towards decarbonization or are we gonna jump straight through to other alternatives?
Michael: So, in terms of natural gas, we think it still plays a really important role in decarbonization, especially in a place like India. No matter what scenario, the share of natural gas in terms of primary energy stays relatively constant across all the scenarios, but the locking-in of resources and infrastructure is something that needs to be balanced going forward. And so, in a place like Europe or the United States, the incremental gains that you can see from natural gas penetrating into the power sector will begin to decline compared to what we've seen already so far in the power sector in those places, and over that same timeframe, in the next 10 years, we expect renewables to play a more prominent role in providing electricity services and electricity to the system. So, it still has a very important role to play and there are exporters, obviously, around the world, including the U.S., including Middle East, including Russia, that all are going to be providing incremental LNG exports to satisfy that demand. But it's important to understand that in certain geographies, natural gas is going to be challenged in those decarbonization scenarios.
Stephen: Yeah, good point. And we are seeing that. In their funding space, there's already major projects and plans afoot to look at renewable feedstock inputs and garner credits accordingly. But I guess when we look at the transportation fuels mix, could it possibly get so extreme, say, between jet fuel versus gasoline that refiners and other industry operators have to look at significantly different ways of making their investment decisions? Already, we're seeing that with refiners idling capacity and converting to renewable feedstock inputs instead of conventional petroleum feeds. How extreme might that get?
Michael: All right, so, in terms of the refining sector, we see roughly 50 million barrels a day of refining capacity rationalization in some of these scenarios where demand falls pretty rapidly. And I think it's important to understand that that process is obviously going to result in a reconfiguration and certain refineries are going to have to retool to, at certain levels of pace, and faster and some slower, depending on their geographic location and the exposure that they have to export markets or to declining internal markets.
And in some cases, what I would say is that the benefit of the fact that we're gonna see a rise in petrochemical demand could mean that you see that naphtha that was going into the gasoline pool being redirected into providing for petrochemical feedstock. If we do see scenarios where jet fuel demand, especially in the near term, does not rebound or does not rebound to the same extent or, by the time we get into the later parts of the outlook, starts to decline, then some of that can be redirected into diesel or into the marine fuel, for marine fuels. So, I think there's a lot of flexibility. But obviously, there's certain refineries that are gonna see a lot of pressure from that.
Stephen: Refiners are looking at having to either reconfigure or retool in order to compete for market share of a dwindling market. Perhaps see a redeployment of assets in different ways, as you say, versus just ultimately shutting down. But if we're already into the front end of all three scenarios, where, in essence, peak demand is already upon us, for all intents and purposes, are we already in this window of the dire competition in downstream refining space? Or will it be a while before people realize that it's happening and it will accelerate in the mid-to-later periods?
Michael: I think that we're very much in that space right now, we're seeing that. And obviously, the goal of the outlook is not to comment on some of these near-term dynamics, but to try to highlight major trends that we're gonna see in the industry, but it's obviously not something that should surprise you or any of the listeners to see that we're seeing an environment right now, very weak refining margins and a lot of rationalization and further flung trade and a unusual sort of dynamics that we've not seen before because of this massive decline in jet fuel demand that looks to be quite lasting, at least, as long as the pandemic lasts.
Stephen: So, in essence, I guess Covid may be masking some of the front end of this longer-term trend for people to assume it's Covid-related versus the underpinning of the long-term fundamental structure and shift in the marketplace, huh?
Michael: Right. Right.
Stephen: Okay, yeah. Well, I guess one or two last thoughts here to explore with you and how important is the...the shiny new objects of electric vehicles and the technology, rapid pace of change and the efficiency gains, how important is the electrification of the vehicle fleet in your business-as-usual case?
Michael: So, in the Business-as-usual case, as I mentioned before, the efficiency issues are far more important in the beginning of the outlook, especially to 2030. But electrification becomes a much bigger issue in the second half. And so, in the BAU scenario, we see the electric vehicles get to, I would say about half of sales by the time we get to 2050, and about 35pc of the overall park. And so, it's a really important thing to understand that they're far different scenarios in a Rapid scenario or a Net Zero scenario where battery costs and consumer acceptance sees a higher penetration of those vehicles. And then you start to see much more of a fuel offset from the electrification vehicles, but obviously, there's a lot of different nuances there in terms of the ability of consumers to accept the different type of vehicle.
And I think that some of that will come from improving the range of those vehicles, the different types of vehicles that are offered. And so that's something that is not going to happen overnight. And that's why we have these long-term outlooks is to look at how fast that might occur. And you're right, in that BAU scenario, in the shorter term, by 2035, it's the electric vehicles are only, on a global basis, only about 25pc of the sales and less than 15pc of the park by 2035. And that's 15 years away from now and look at all of the improvements that have been made so far in terms of the battery costs coming down.
Stephen: Gotcha. Well, the advancements in technology continue to seem to accelerate. Ten to 15 years sound like a lifetime to some people. But this appears to be a consumer acceptance issue and the fact that people are attracted to new tech and efficiency gains and are...how should we say? Putting their money where their environmental conscience sits, perhaps. So, we'll see that happen sooner than later.
Listen, Michael, it's been a pleasure exploring these scenarios with you. I'd like to encourage our listeners of the podcast to explore these scenarios, they're posted on the BP website, they are very thought-provoking. They are issues that I think you'll find worthwhile to explore.
Again, I wanna thank Michael for joining me today on our "Driving Discussions" podcast. If you enjoyed this podcast, please be sure to tune in for other episodes in our series. We have further information about the global refined products marketplace and our service offerings. If you wanna visit argusmedia.com, you'll find all the information there. So, again, thank you, Michael.
Michael: Thank you, Stephen.
Stephen: And I look forward to our next visit and wish you well. And thank you.
Michael: Thank you so much.
Stephen: You bet.
Michael: Take care.