If there is a stairway to heaven but a highway to hell is global oil demand going to peak in the foreseeable future or not? At this stage it is simply impossible to accurately forecast when the world’s thirst for the black gold stops growing. These are uncharted waters just like the dot.com bubble or the adventure of oil prices over the $100/bbl mark for the very first time in 2008. It will happen but there are simply too many known unknowns to be able to pin down when peak demand will arrive.

A number of media outlets were quick to seize on the latest annual supply-demand outlook from BP released in September and carried the headlines of “The world has already passed peak oil demand”. Whilst the oil major has indirectly implied such a scenario (oil demand would not surpass the 2019 level when measured in terms of energy it contains) it is imperative to point out that it is only one of the three possibilities that has been revealed. Probably it more plausible to expect the peak to arrive around 2030, something that another European major, Total, would also advocate. OPEC is less upbeat on peak oil demand as the organization predicts that the growth in global consumption will be reached around 2040.

The energy transition is undoubtedly under way and in 2021, possibly aided by the health crisis, the goal set out in the 2015 Paris climate accord all of the sudden looks more realistic than ever. China has announced to target 2060 to reach net zero emission. The EU, South Korea and Japan have an even more ambitious 2050 deadline. The US, with president-elect Joe Biden on his way to the White House is joining the latter three.

Transition from fossil fuel will happen but the other question, apart from when, is to what extent. How far will oil demand fall? The major source of oil demand contraction will be the decline in gasoline demand as the rise of electric vehicles (EV) seems unstoppable. Currently cars are responsible for 20% of global consumption whilst cars and light truck for 35%. This year 50% more EVs are forecast to be sold than in 2020, however, it is still less than 5% of the total. There are, however, two major obstacles for EVs gaining popularity in the foreseeable future. The first one, as pointed out in Daniel Yergin’s hugely enjoyable book, The New Map, is that EVs are cheaper to run but it is much more expensive to store the energy. Batteries are way too expensive to reach the critical mass in selling EVs, which leads to the second hurdle. EVs are currently a reasonable choice of vehicles due to government subsidies. Because of the massive fiscal and monetary stimulus packages all over the world it is questionable whether this support for EVs will remain available and if not, gasoline demand would obviously rise more in the near future than currently anticipated.

It is also worthwhile noting that most of the zero carbon emission targets are on a net basis. There is a massive difference between zero carbon emission (buy an EV and stop consuming gasoline) and net-zero carbon emission (use your car that runs on combustion engine but plant a tree after, say, every 1,000 miles you travel). The transportation sector will likely need oil for years to come.

The supply side of the equation, however, has already started to prepare for the post-fossil fuel era. These preparations have been hastened by outbreak of Covid-19. US domestic production is seen contracting by 910,000 bpd in 2020 and a further 240,000 bpd this year, according to the EIA. This is despite non-OPEC supply is to recover by 1.22 mbpd to 64.89 mbpd in 2021. This growth rate is much less than the predicted demand growth (+5.78 mbpd) implying global stock draws, especially in the second half of this year.

The health crisis is having a profound impact on short-term exploration and production. Oil majors have cut last year’s spending by well over 20%, which is around $40 billion lower than the initial spending plans. The world’s biggest oil company, Saudi Aramco, is planning to slash capital spending to $25 billion, a 50% reduction from the original level.

The refining industry has also been heavily hit by the pandemic. The resulting dive in refining margin is leading to worldwide refinery closures. The International Energy Agency estimates that around 1.7 mbpd of refining capacity will disappear in 2020-2021, part of which had been planned pre-pandemic, but another part triggered by the health crisis. That is 1.7 mbpd of less products available in the immediate future. A number of refiners across the globe have been mothballed lately and even if they restart, they might do so with reduced capacity.

Looking further ahead oil producers facing the daunting task of replacing outputs that are being lost through natural decline. As depletion rates of maturing oil fields are anywhere between 4%-7% (3.9 mbpd-6.8 mbpd) the IEA warns that sufficient long-term oil supply is anything but guaranteed and estimates that over $20 trillion of investment is required over the next 20 years to satisfy global oil and natural gas demand. Consultancy Rystad Energy reckons that global exploration has to expand significantly unless the transition takes hold much earlier than currently anticipated.

These exploration projects need financing, something that investors and lenders are growing in reluctance to do. Several funds, including sovereign wealth funds, refuse to invest into exploration and production companies whilst lenders are also cutting energy companies’ borrowing bases. The underlying sentiment is probably best demonstrated by the refusal to finance drilling projects in the Arctic refuge. All the major US investment banks are declining to finance oil and gas exploration in Alaska that President Trump opened to drilling last November.

The developing picture is not one that suggests equilibrium. The transition from fossil fuel is under way but it seems that there is a tangible mismatch between producers and consumers adjusting their activity and behaviour to the new oil world order. This time lag can easily lead to general supply shortage in coming years before global oil demand will start declining unambiguously.