Plenary Session: “Regional Economic and Energy Outlook”

The last slot of the plenary session was devoted to a presentation by Kurt Barrow, vice president of Oil Markets Midstream & Downstream at IHS Markit, on how the energy transition will affect the oil and petrochemical industries.

After stating that the oil and petrochemical markets will be “deeply shaped” by the energy transition, Barrow was keen to remind the audience that the energy transition is actually nothing new. “Energy markets are always in transition: 10 years ago we did not have shale oil; we were looking to import LNG into the United States; LNG was still a point to point business without a spot market; PV Solar Power did not have the commercial scale that it has today; and all the discussion about renewables was focused on wind,” he pointed out.

A Conversation about Climate

The current transition, Barrow explained, is focused on climate change and the decarbonizing of the energy mix, which is a difficult task. “The operating and financial companies are under a lot of pressure to develop a strategy that addresses climate and the energy transition. The scale of the challenge is enormous,” he said, adding that the speed and nature of the changes vary greatly from one market to another.

“Different markets move at different paces: places like California or Europe are looking at electrification and even hydrogen, but Latin America will not reach that stage for some decades still.” Similarly, he continued, gas is very important as a transition fuel in many markets, but in others there is “a trend to leapfrog gas and go directly from oil and coal to renewables.”

Looking at Latin America, Barrow explained that coal has a much smaller role than in other regions, while oil, gas and hydropower generation are very important. “Going forward, we expect a lot more renewables in the power sector, with a more balanced picture and gas playing a very important role as well,” he added.

Barrow described two potential scenarios for how the energy transition could take shape until 2050: in the so-called ‘Rivaly’ scenario, oil would continue to play a substantial role in the energy market, with a very slight reduction versus 2018. In contrast, in the ‘Autonomy’ scenario, the use of oil would decrease sharply, giving way to growing natural gas, renewables and modern biomass segments.

Transport Drives Oil Demand

If the use of oil in power generation could fall dramatically, what does the energy transition mean for oil demand? Barrow focused on other end-users of oil and showed that fundamental demand to transport both goods and people will remain strong moving forward, with solid growth rates in car transportation, commercial trucking, waterborne shipping and aviation. “The challenge is how to meet these transportation needs with lower carbon emissions,” he affirmed.

So far, most policymaking efforts have targeted cars, with a transformation of fuel economy standards that were put in place in the 1970s in many countries, for reasons that had less to do with the environment and climate change than with security of supply or balance of trade. The transformation is already happening, with more complex technologies, said Barrow, such as mild hybrid cars, full hybrid cars, plug-in hybrid cars, battery-electric vehicles, etc. “By 2050, we expect one in four miles to be driven by an electric car globally, and this process will be led by the United States, China and Europe. In Latin America, we will see less of this development,” he said.

Also, the fuel economy regulations affecting commercial trucking are fairly recent, said Barrow, in a process that was started by Japan and followed by China, the United States and Europe. “Even in the United States, regulation has only recently started to come into force, so it is only now that people’s behavior is starting to change,” explained Barrow.

Beyond cars and trucks, policymaking is already focusing on other segments. “What we will see is more activity and more regulations being put in place in the marine and aviation standards moving forward,” said Barrow. The interesting thing here is that, besides new standards affecting fuel quality such as IMO 2020, the shipping and aviation industries have a great opportunity to reduce emissions by introducing new technology and improving efficiency along their value chains: “There are operational improvements that can be made in terms of how we schedule and route both ships and planes, and there is big scope, particularly in the shipping industry, to improve the fuel economy in terms of propulsion systems and technologies for water flow around the ship.”

The Big Picture for Oil

Longer term, the implications of technology changes are deep for the oil market. Indeed, reminded Barrow, we are transitioning from a world where oil demand was growing by 1 to 1.5 million barrels a day every year to a world where growth is slowing down and will ultimately plateau or even decrease in the early 2030s, although that varies widely from region to region: “In Latin America, growth in demand slows down but continues past 2050,” he said.

In this moment of transition, international oil companies (IOCs) as well as national oil companies (NOCs) need to adapt. If the combustion engine eventually dies, there will be an impact on refiners, which used to be focused on transportation fuels and now will increasingly dedicate product to end users in the petrochemical industry. “Most refiners were built to make transportation fuels. Over the last years, the fuels-centric strategies have transformed into petrochemical feedstock-centric strategies.” In other words, the current conversation is around crude oil to chemicals. “That is what is driving the strategies of IOCs and NOCs.”

IHS Markit’s expectation is that these large oil players will increasingly dedicate product to the petrochemical industry. The organization shared a projection into 2024 whereby all major oil players, with the exception of BP, will be increasing their degree of integration between their oil and petrochemicals activities.

The Price-Supply Dynamic

Barrow closed his presentation with an analysis of current supply and price dynamics in the oil markets – behavior that is always difficult to predict. He pointed to Saudi Arabia, Russia and the United States as the three big influencers in the crude oil markets. A particularity of the U.S. industry is its high reactivity to the oil price: “When oil prices are up, U.S. producers drill and spend more. When oil prices are down, they drill and spend less,” he explained.

Interestingly enough, this is exactly the opposite of what OPEC producers try to achieve, as they typically try to push oil price up by pumping less oil to the market. “In 2019 and 2020, the supply of oil is bigger than the demand, which is why OPEC is in a catch-22 situation: if they pull back supply enough to increase prices to US$70 per barrel or more, that will stimulate U.S. production and create more competition. That is exactly what we are seeing here today,” he concluded.