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Oil is preparing to make an 'S curve': this will be the last dance for oil and the economy

Written by Noel Budeguer
Published 11/06/2024 às 18:29
Oil - Gas - economy
Oil is preparing to make an 'S curve': this will be the last dance for oil and the economy

Discover the future of oil with the S-curve. Analyze Goldman Sachs and IEA's forecast on the global economic impact and crude oil development through 2040

Every year, dozens of predictions are published that set a date for the beginning of the end of oil. The powerful emergence of the electric car, improvements in the efficiency of combustion engines or the reduced use of hydrocarbons in industries in developed countries have led to this decade being seen as the last in which global oil demand will increase. However, there are so many factors that can influence oil consumption over a period of years, that the 'bets' are varied and all seem to have logic and foundation. One of the latest was that of Goldman Sachs which, in contrast to the consensus outlined by the International Energy Agency, believes that oil demand will continue to grow for a few more years. So will the last Dance between oil and the economy.

Situational movements in oil

In addition to cyclical movements in oil caused by temporary changes in demand (which changes depending on the economy) and supply (according to OPEC cuts and production in America), the price of oil can also be analyzed in the long term. The long-term scenario that appears to be most likely for investors and international organizations points to a global demand for oil that will begin to fall at the end of this decade. The International Energy Agency (IEA) dares to establish a concrete exercise to mark the beginning of the end of oil demand: 2030 is that 'magical' year. In its base scenario, the IEA assumes that all governments meet their energy and climate commitments in full, predicting that global oil demand will reach a maximum in 2030. From then on, it will be all declines for global oil consumption.

Goldman Sachs which, in contrast to the consensus outlined by the International Energy Agency, believes that oil demand will continue to grow for a few more years .Source: thetricontinental

Goldman Sachs and the last oil dance

However, Goldman Sachs economists believe a key factor is being ignored. Everyone focuses on the electric car, on energy efficiency... but few look at what is happening in the global economy. A good part of the world's population is about to enter a phase of economic development that creates a kind of 'sweet spot' for oil consumption. This point is the moment when the income level is exceeded that allows consumers to start traveling, taking planes, buying a car and carrying out other leisure activities that are fueled by petroleum derivatives. A good example is India, with around 1,5 billion inhabitants who will reach the 'sweet spot' in the coming years.

“While the impact of electric cars on gasoline demand has received a lot of attention, less attention has been paid to the fact that average global GDP per capita is approaching a sweet spot in the coming years, with every dollar that increases yields will likely generate an increasing amount of demand for gasoline,” say Goldman Sachs economists.

The S-curve of demand growth

When viewed from a long-term perspective, growth in oil demand shows a non-linear relationship with growth in per capita income. In other words, a higher per capita income (wealth or development) does not always generate a proportionally greater consumption of fuel. For example, each euro that increases income in a very developed country does not increase oil consumption significantly, sometimes it even reduces it. However, in developing countries, each extra euro of income significantly increases the demand for fuel.

Therefore, Goldman Sachs economists assure that oil consumption has a relationship with income that can be represented through an 'S-shaped curve'. This curve presents a growth pattern in which oil demand increases slowly in economies with very low per capita incomes (Africa, for example), to later enter a phase of positive acceleration, which grows rapidly, approaching a exponential growth rate, as occurs in the 'J'-shaped curve; but which then decreases in a phase of negative acceleration until demand stabilizes at a zero growth rate and ends up even declining (the final peak of the 'S').

Practical examples of the S-curve

In a more graphic way and with examples, the beginning of the 'S' can be explained as follows: in a very poor country, for example, South Sudan, economic growth can translate into an improvement in food, clothing, housing … This growth generates a very low increase in demand for hydrocarbons. However, oil demand accelerates as yields increase and reach a medium-low level, as occurred in China in the late 90s and 2000s, or as is now occurring in India. During this increase, the 'S' takes off upwards, before slowing down to a saturation point, which is the end of the 'S', which is reached when the economy already reaches a high point of development, explains the report from the Goldman Sachs.

“World economic growth is gradually lifting the world population up the scale of consumption expenditure: consumption patterns evolve as individuals move from lower to higher income levels, thus driving a growing demand for oil until to a certain extent… If we look across regions, emerging markets in Asia are likely to drive most of the growth in global oil demand in our forecast”, comment from Goldman Sachs.

India and China devour oil

“We anticipate that China will contribute positively to global oil demand until it reaches its maximum in the late 2020s. In the case of India, although our specialized engine team expects rapid electrification of India's two-wheelers (which represent more than 50% of India's gasoline consumption), as well as automobiles, the solid expansion of India's passenger vehicle fleet will offset the impact, which would lead to continued growth in demand for India's transportation fuel across the forecast”, explain these experts.

With all this data, Goldman economists come to the big conclusion: there is still a full decade to go before peak oil demand is reached. We raised our demand forecast for 2030 to 108,5 million barrels per day. We believe that peak demand or peak oil demand will not arrive until 2034. Not only will it arrive later, but demand will also stagnate at maximums (110 million barrels per day) until 2040, when it will begin to fall little by little.

Our outlook for oil is more optimistic than that of the IEA, which predicts that oil demand will peak before 2030. If we also “include a scenario of slow adoption of electric vehicles, given the recent stagnation in vehicle sales electricity, this would imply that demand for oil would continue to increase until approximately 2040, reaching a ceiling of 113 million barrels per day.

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Noel Budeguer

Of Argentine nationality, I am a news writer and specialist in the field. I cover topics such as science, oil, gas, technology, the automotive industry, renewable energy and all trends in the job market.

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