“This is permanent demand destruction”

This time, OPEC has to deal with long-term decline instead of one-off shocks

“This is permanent demand destruction”
Photo: pikist.com

COVID-19 has significantly hit global oil markets, as industrial production and air traffic have drastically decreased all over the world. In April, the Organization of the Petroleum Exporting Countries (OPEC) implemented unprecedented output cuts, but if oil consumption never fully recovers, the cartel will have to adapt to the new reality.

The coronavirus crisis may have triggered the long-anticipated tipping point in oil demand, and it is focusing minds in OPEC, considers Reuters. Crude consumption has dropped by as much as a third this year due to the pandemic. Coupled with the rise of electric vehicles and a shift to renewable energy sources, the trend is pushing forecasts for long-term oil demand down and prompting some OPEC officials to revise their views.

The world’s oil demand has climbed steadily each year, with occasional exceptions amid economic downturns. Last year, global oil consumption amounted to 99,7 million bpd, and OPEC expected it to reach 101 million bpd in 2020. However, the cartel slashed its forecast for 2020 to 91 million bpd after global lockdowns in the first half of the year. Next year’s demand is also seen below 2019 levels. As for long-term forecasts, OPEC is expected to announce another downward revision in its November report.

If consumption starts a permanent decline, OPEC will need to maintain constructive relations inside the group and cooperate even more closely with other producers, such as Russia, to maximise falling revenues. According to Chakib Khelil, Algeria’s ex-minister of energy and twice OPEC’s president, “this trend will put a stress on the cooperation between OPEC members, as well as between OPEC and Russia, as each strives to maintain its market share”. Short-term challenges are likely to arise within the cartel, as some members, such as Iran and Venezuela, may seek to increase production.

“OPEC’s job will be harder in the future because of lower demand and rising non-OPEC production,” agrees Hasan Qabazard, OPEC’s head of research from 2006 to 2013. He believes that the group may have a little more time to adjust before demand peaked, but the deadline for OPEC to adapt is approaching. “This is permanent demand destruction,” considers Qabazard adding that fallout from the COVID-19 pandemic has changed consumer habits for good.

The International Air Transport Association expects air travel to reach 2019 levels not earlier than in 2023. Photo: Mx. Granger

In recent decades, volumes of consumed oil have risen thanks to more cars on the roads, rising air travel and the development of petrochemical industry, but the share of oil in the global energy mix has fallen steadily. Crude accounted for about 40% of the energy used in 1994 but only for 33% in 2019. Now the world is turning to renewables, more electric vehicles are produced, while airlines are struggling to recover from the pandemic. The International Air Transport Association expects air travel to reach 2019 levels not earlier than in 2023. According to an anonymous OPEC official, “once aviation recovers by end-2023, demand will go back to normal — aside from the competition from other sources of energy”.

If oil consumption never fully recovers, it may become a mounting challenge for OPEC. Most members of the group rely heavily on crude, and current oil prices are well below the level they need to balance their budgets, says Reuters.

By Anna Litvina