(John Kemp is a Reuters market analyst. The views expressed are
his own)
* Chartbook: https://tmsnrt.rs/2ZK9O6l
By John Kemp
LONDON, July 6 (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.
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 (https://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). 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.
(Editing by David Evans)