LONDON (Reuters) - Petroleum consumption growth has been slowing for decades and the industry shows increasing signs of maturity, which will have profound implications for the business strategies of oil-producing companies and countries.
FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo
Slower growth will intensify intra-company and intra-company competition for market share putting downward pressure on prices, revenues, investment and employment over the next two decades.
Petroleum has always been a deeply cyclical business and there is no reason to expect any lessening of cyclical volatility (“Oil prices, or how I learned to stop worrying and embrace the cycle”, Reuters, April 25, 2018).
But consumption growth has been progressively slowing since the early 1970s and that underlying trend looks set to continue through the 2020s and 2030s (tmsnrt.rs/2ZK9O6l).
Over the last five decades, the global economy has continued expanding but consumers have become efficient in their use of oil or substituted cheaper fuels such as natural gas.
Oil consumption has grown much more slowly than GDP and the relationship between the two has become increasingly weak.
There is every reason to expect that slowdown to continue and intensify if there is a widespread displacement of petroleum by electric vehicles.
A SERIES OF SHOCKS
For the last 20 years, the oil market’s increasing maturity has been masked by China’s rapid industrialisation and by the disruption of a number of a number of previously significant sources of production.
Venezuela, Iran, Nigeria and Libya, all once significant producers within the Organization of the Petroleum Exporting Countries (OPEC), have seen their output slashed by sanctions, war, unrest and mismanagement.
Over the next two decades, however, it is not certain India or other emerging markets can replicate China’s enormous boost to consumption or that other major producers will be disrupted.
Market maturity, coupled with the shale revolution after 2008, led to over-production and the market-share war fought between 2014 and 2016, which erupted again in 2020.
The next two decades are likely to see recurrent volume wars unless the major producers can agree on a way to share out a slow-growing or stagnant market.
Market maturity was also the principal reason why the major oil companies were forced to cut their long-term price assumptions recently.
Importantly, there have been increasing signs of maturity even before widespread electrification of transportation – which still remains a future rather than a current competitor to petroleum.
DECELERATING GROWTH
Before the oil shocks of the 1970s, global petroleum consumption had been growing at average rates of around 8% per year.
Growth at this rate was unsustainably fast and incompatible with the low oil prices prevailing in the 1950s and 1960s, directly creating the conditions for the oil embargoes and nationalisations of the 1970s.
Following the oil price shocks of 1973/74 and 1979/80, global consumption growth slowed to an average rate of less than 2%.
Since the global financial crisis in 2008/09, global consumption has slowed even further to well under 1.5% per year.
Progressively slower growth in consumption has been apparent through the ups and downs of the business and oil price cycles.
The slowdown was evident in 2019, even before the coronavirus pandemic plunged the oil industry into the worst crisis in its history.
GROWTH AFTER CHINA
Since 1995, consumption in the advanced economies of the OECD has been flat; growth has come entirely from the fast-growing economies of the non-OECD, especially China.
China, as a large, fast-growing and increasingly prosperous economy, has accounted for around 40% of all the growth in oil consumption over the last quarter of a century, rising to 50% since 2007.
China’s consumption has increased at an average annual rate of over 5% since 2007 compared with just 0.6% in the rest of the world.
China’s reintegration into the global economy since the 1980s, after two centuries of backwardness, is an exceptional economic development that may not be replicated in the next 25 years.
India is probably the only single country large enough that it might replicate China’s extraordinary growth in oil consumption over the next quarter century.
Beyond that, the big consumption growth is most likely to come from groups of countries in South and Southeast Asia, Africa and Latin America.
But none are yet showing the extraordinary surge in oil consumption China has experienced since 1995.
LONG-TERM SCARRING
Each of the three major shocks to the oil market (1973/74, 1979/80 and 2008/09) resulted in “scarring” – consumption never returned to its pre-shock trend. Some of the lost consumption proved permanent.
Scarring has been especially significant in the advanced economies, with few or no signs in China and other fast-growing non-OECD economies, reinforcing the shift in consumption growth to emerging markets.
The coronavirus pandemic is also likely to result in permanent scarring with consumption throughout the 2020s remaining lower than it would have been in the absence of the pandemic.
Even if oil consumption rebounds to it pre-pandemic level by 2022, as many analysts anticipate, it will still be lower in 2025 and 2030 than it would have been without coronavirus.
The lower consumption trajectory implies lower prices, other things being equal, which is why oil companies have begun to revise down the forecast prices they used for investment appraisal and planning.
The industry is likely to remain cyclical, with alternating periods of boom and bust, but prices are likely to be lower on average over the cycle (“Oil prices likely to average less than $60 over next cycle”, Reuters, June 17, 2020).
PRODUCER CHALLENGES
In a rapidly growing market, all major producers can boost their output simultaneously, but a slow growing market will be closer to a zero-sum game.
Rapid market growth can accommodate a broad range of higher and lower cost producers; slower growth will make business conditions much tougher for producers with a high cost base.
In a mature market, all producers will have to prioritise operational efficiency and cost control rather than output growth.
For major international oil companies, the focus will shift to delivering projects that break even at lower average prices to ensure they produce acceptable returns to shareholders.
For OPEC countries, the focus will be adapting their government budgets to lower oil prices and export earnings, intensifying the pressure to diversify their economies and find alternative non-oil sources of income.
For U.S. shale producers, the focus will shift from rapid output expansion and the expectation of higher future prices towards profitable operation at more modest prices through the cycle.
Petroleum is a depleting industry. Output naturally declines unless capital is invested to sustain output and replace produced reserves. Some estimates put the worldwide depletion rate at 6-9% or 6-9 million barrels per year.
So even if consumption growth slows, and eventually peaks, hundreds of billions of dollars of capital will still need to be invested to sustain output levels and counter natural declines, likely for many decades.
Prices and profits will need to remain high enough to attract and retain sufficient capital within the industry to maintain production.
But the industry appears to be shifting from expansion towards a more mature state, implying a set of very different business dynamics in the next 20 years compared with the last 20.
(John Kemp is a Reuters market analyst. The views expressed are his own)
Editing by David Evans
"consumption" - Google News
July 06, 2020 at 05:39PM
https://ift.tt/3f7cWQa
Oil producers will fight for market share as consumption growth slows: Kemp - Reuters
"consumption" - Google News
https://ift.tt/2WkKCBC
https://ift.tt/2YCP29R
Bagikan Berita Ini
0 Response to "Oil producers will fight for market share as consumption growth slows: Kemp - Reuters"
Post a Comment