Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 382

Momentum or rupture: has demand for oil already peaked?

‘Peak oil’ is a phrase that has been around for some time, but some industry watchers believe that we may have now already reached that milestone.

While the world is currently in the grip of the COVID-19 pandemic and its effects are grabbing the headlines, in a decade’s time - from a purely economic perspective - COVID-19 may be seen just as importantly as ringing the bell on oil, which has been the dominant energy source for the past century.

Demand for oil may never reach prior levels

BP PLC, one of the seven global ‘supermajor’ oil companies, has called the top for oil, saying that demand will never again reach pre-pandemic levels and will be, in its most bullish case, broadly flat for the next two decades. Fossil fuel demand will be challenged by other power types, namely electricity, which will be supplied by a growing grid of cheaper solar and wind sources.

Source: Bloomberg

Others believe global oil demand could rise above pre-COVID levels by mid to late 2020s before declining. Oil demand may rise from 91.7 million barrels a day (MMbls/d) this year to slightly above 100MMbls/d by the mid-2020s. In a conservative net zero emissions (EU + China) case, brokers are predicting oil demand will then fall to 75MMbls/d (a decline of ~25% from 2019 levels).

Where the OECD and China pursue net zero carbon outputs, oil demand could fall to 54MMbls/d (-45%) by 2060. In a net zero (all countries) scenario, demand could fall to as low as 21MMbls/d (~-80% from current levels).

For its part, French oil giant Total SE (another supermajor) has set out two likely future scenarios:

In its first scenario, which it has called 'Momentum 2050', there is a green deal in Europe, while outside of Europe actions are based on individual country carbon targets. There is also aggressive deployment of proven technologies such as EVs, solar and wind, and biofuels. Under this scenario, 60% of cars are electric and sustainable aviation fuels make up 15% of total demand by 2050.

In its second, more extreme scenario, called 'Rupture 2050', all countries commit towards net zero carbon emissions with strong shifts in public policies as well as technology breakthroughs in new industries like hydrogen, synthetic fuels and carbon capture. Under this scenario, it has 75% of cars as being EVs and 60% of aviation being sustainable by 2050.

For Total, it is not that energy demand will dwindle – all of its scenarios see an increase in demand for energy globally – but that low-carbon power will increase its supply.

Source: Total

Under both scenarios Total is anticipating oil to peak in the coming decade, saying demand growth will end around 2030 and then decline due to the electrification of end uses, transport transformation and the greening of the petrochemical industry.

What about the supply side?

As we all know however, the oil price is a function not just of demand but also of supply. Will we see another cycle in the oil price in the next decade as supply falls to match demand, or is the fall in demand sure to make it all downhill from here?

The first point to make is that not everyone agrees that peak oil is here or is imminent. Oil remains the standard from which all other power sources are judged and is seen by many in the industry (and OPEC) as the only commodity that can satisfy the demands of an increasing global population and expanding middle class.

However, even a long-term price of US$40 a barrel does not necessarily mean value destruction for the lowest-cost oil majors in the medium term. Rather, the lack of incentive to invest in new fields could see them run down their reserves and not drill new wells, increasing free cash flow in their fossil fuel operations while they pivot towards delivering power from carbon-free (renewable) sources.

The other alternative could be that the fall in investment because of low oil prices and the subsequent supply shortfall in the medium term triggers another oil price hike in the 2020s, before we see another top out of prices in the 2030s as electricity makes more of an impact, i.e. we will see one last oil price cycle.

Contrarian investment opportunities

For the moment, investors in oil-related equities are relying on price levels remaining at current levels, i.e. that we will not see another cycle of oil prices rising on the back of a supply-side squeeze. This may present an opportunity for the judicious (and somewhat contrarian) investor.

We are understandably cautious about the oil industry but given the cheap valuations in the sector it would be unwise to ignore it. For our part we hold Royal Dutch Shell in the global portfolios. We believe Shell is well placed to perform in the coming years, having adapted its cost structure to operate in the current low-price environment. Shell is capable of paying a 5% dividend yield even if the oil price stays low.

In the past few years, Shell has also transformed its upstream portfolio, having divested its high cost projects and invested in offshore projects which will yield significant returns as oil demand continues to recover from its pandemic lows.

Relative to other oil majors, Shell is better placed as the energy complex transitions away from oil, being the industry leader in gas (LNG) and will benefit as governments worldwide reduce their reliance on energy generation from coal. Furthermore, Shell can leverage its substantial retail network and differentiated trading capability to creatively profit from the shift to renewable and green energy.

 

Douglas Huey is a Portfolio Manager at PM Capital. The content reflects opinions as at the time of writing and may change. PM Capital may now or in the future, deal in any security mentioned. It is not investment advice.

 

[1] Source: Bernstein

RELATED ARTICLES

The tipping point for investing in decarbonisation

Ignore solar parity at your investing peril

Electricity transmission is Australia's next problem

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Latest Updates

Superannuation

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Economy

Should Australia follow Trump's new brand of capitalism?

A new brand of capitalism may be emerging - one where governments take equity in private companies. Is it state overreach, or a smarter way to fund public goods without raising taxes?

Gold

Why gold may keep rising - and what could stop it

Central banks are buying, Asia’s investing, and gold’s going digital. The World Gold Council CEO reveals the structural shifts transforming the gold market - and the one economic wildcard that could change everything. 

Investment strategies

Fact, fiction and fission: The future of nuclear energy

Nuclear power is back in the spotlight, including in Australia. For investors exploring the sector, here are four key factors to consider in this evolving energy landscape. 

Taxation

The myth of Australia’s high corporate tax rate

Australia’s corporate tax rate is widely seen as a growth-killing burden. But for most local investors, it’s a mirage - erased by dividend imputation. So why is it still shaping national policy? 

Taxation

Should we change the company tax rate?

The headline 30% corporate tax rate masks a complex system of dividend imputation and franking credits that ensures Australian shareholders are taxed only once, challenging traditional measures of tax competitiveness. 

Investing

Noise cancelling for investors

A lot of the information at an investor's fingertips today has little long-term value. The modern investing greats are not united by access to faster information, but by their ability to filter out what doesn’t matter.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.