The total demand for liquid hydrocarbons is playing out as a tug of war between growth in the petrochemical sector, and declining demand from passenger cars, according to a recent report by McKinsey & Company.
According to the report, petrochemical feedstock will drive 70% of the growth in demand for liquid hydrocarbons through 2035. Demand for liquids, excluding chemicals, will peak and flatten by 2025 because of a decline in demand from light vehicles. The petrochemicals demand will drive the growth of light end products, a large share of which are not made from crude oil.
McKinsey identified six key points:
1Growth in global energy demand will decelerate to 0.7% per year through 2050, a rate 30% slower than previously forecast.
2Emerging and developing countries will drive all growth in energy demand, while European and North American demand will decline.
3 Chemicals will grow at more than double the rate of total energy demand, while light-vehicle demand will peak around 2023.
4Demand for electricity will outpace demand for other energy sources by more than two to one. Solar and wind will represent almost 80% of net added capacity and 34% of generation by 2050.
5Fossil fuels will still dominate the total energy mix through 2050, but their share of total energy will decline to 74% from 82%. While gas is a relative winner (growing at almost twice the rate of total energy demand), coal will peak by 2025, and oil demand growth will flatten to 0.4%.
6Energy-related carbon dioxide emissions will flatten and start to decline around 2035 as a result of the transformation of light vehicles (i.e., more efficient combustion engines and more electric vehicles on the roads), and the strong shift to wind and solar in power generation.
The industry’s traditional rule of thumb is that chemicals demand grows at 1.3 to 1.4 times the rate of GDP. Globally, McKinsey sees this relationship changing, especially as mature markets reach a saturation point for plastics. According to the report, markets such as Germany and Japan are clearly declining in per-capita plastics demand. As a result, McKinsey sees chemicals demand growing at only 1.2 times GDP in the short term, from a global perspective. In the long term, that growth will decline to match the GDP growth rate. Two elements could transform chemicals demand further: plastics recycling and plastic-packaging efficiency. “If we imagine that global plastics recycling improves from today’s 8% rate to 20% in 2035, and that plastic packaging use declines by 5%, demand for liquid hydrocarbons driven by chemicals could be approximately 2.5 million barrels per day below our business-as-usual case,” says the report.
Light Vehicle Growth
McKinsey’s latest automotive consensus suggests that by 2030, electric vehicles (including hybrids and battery-powered plug-in vehicles) could represent close to 50% of new cars sold in China, the European Union, and the United States – and about 30% globally. Also, for the first time, McKinsey’s business-as-usual case includes autonomous-vehicle adoption and car sharing. If the market penetration of electric, autonomous, and shared vehicles accelerates, oil demand driven by light vehicles could be approximately three million barrels lower in 2035 than assumed in the business-as-usual case. Together, this accelerated adoption of light-vehicle technologies and the adjustment of plastics demand could reduce 2035 oil demand by nearly six million barrels per day. An important result is that oil demand will peak around 2030, at fewer than 100 million barrels per day, in this scenario.
Underlying these outcomes, the McKinsey Global Institute (MGI) sees reduced macroeconomic growth for the coming decades, including changes to the structure of growth.
“The global population is aging. By 2050, about 25% of the population of developed economies, including China, will be 65 or older – this means a lower proportion of workers in the total population. This relatively shrinking labour force will lead to a global macroeconomic downshift.” Assuming current trends continue, with no unexpected uptick in productivity, MGI expects growth in GDP to be 40% lower during the next 50 years compared with the previous half-century.
Additionally, the structure of GDP growth is shifting toward services. MGI’s latest research suggests that China, today’s second-largest energy consumer, is shifting its economy from heavy industry to services to keep growing. At the same time, the surge of energy-intensive industrialization that we have seen in China during the past decades will likely not be replicated elsewhere. That means a greater share of global GDP will be driven by services, which are less energy-intensive.
The energy intensity of GDP growth is declining further as a result of structural shifts at the individual-sector level. For example, during the past 35 years, internal combustion engines in passenger cars have become approximately 20% more efficient. The industry expects another 40% improvement in efficiency through 2035. Accounting for all sectors of the economy, the energy intensity of global growth will fall by 50% through 2050.
The downgrading of the energy-demand outlook has material implications for investments, including decisions being made today.
McKinsey states, “This is our business-as-usual case, which has significant sensitivities. For example, it would be affected by changes in GDP growth. Oil prices could decline, which could increase demand, thereby affecting the overall demand outlook. Acceleration of technology development and adoption could alter the economics of alternatives (for example, lower electric-vehicle-battery prices). Individuals and businesses could change their behaviours (for instance, making residences more energy-efficient). Changes in policies and regulations could realign incentives for suppliers and consumers (such as carbon taxation). We will deepen our analyses on all of these issues in the coming months.” nJN