Oil demand could peak in next 2-5 years: McKinsey report

Oil demand could reach its peak in the next two to five years, McKinsey & Company’s ‘Global Energy Perspective 2022’ stated. The primary driver for the reduction in growth is likely to be a slowdown in the demand growth for road transport, the report added. While oil has been growing by 1-2 MMb/d, half of which was through road demand growth.

The pandemic slowed down growth too but it has gradually picked up. The report, however, projected that the trend is likely to change from 2024 onwards.

The reduction in oil demand for road transport is the uptake of electric vehicles. The report added that global EV sales saw an uptick of 62 per cent per annum on average in the last four years. In 2021 alone, this growth was marked at 96 per cent. In absolute terms, EV sales increased to 6.6 million in 2021 from 2.3 million in 2019.

Europe was the leader in EV sales as it accounted for 20 per cent of the total car sales. US EV sales accounted for 5 per cent but doubled year on year.

The demand in 2050 could be 35-50 per cent lower than the current levels. Liquids demand in road transport is expected to decline 75 per cent by 2050, following the peak in the early-2020s. This decline will be driven by the slow growth of cars on the road, increased efficiency, and a higher volume of EVs. However, aviation liquids will continue to grow but the increased adoption of bio- and synfuels will cut demand for fossil kerosene.

Power supply and demand

Global energy consumption is also expected to flatten in the coming decades. It added that despite rapid economic and population growth, energy consumption is projected to grow only 14 per cent. This will most be because of greater end-use efficiency in buildings, transport and industry.

The role of electricity in the final consumption mix is projected to increase from ~20 per cent to 40 per cent by 2050. Fossil fuel consumption is likely to be ~40 per cent lower in 2050 as compared to 2020 due to an uptake of hydrogen.

Transportation is expected to see the fastest transition to electricity due to the adoption of EVs as it reaches cost parity with ICE cars in the mid-2020s. Increasing living standards will drive increased usage of appliances, bringing the buildings sector to ~60 per cent electrification in 2050 from ~30 per cent today.

Renewables are projected to account for 80-90 per cent of power generation globally by 2050. The report added that renewable energy sources (RES) are expected to double their share in the next 15 years from 29 per cent to 60 per cent.

Due to declining costs, solar and onshore wind are projected to make up 43 per cent and 26 per cent of generation respectively in 2050. Thermal generation is expected to play an important role as a flexibility provider.

Green hydrogen is expected to account for 28 per cent of power generation by 2050.

Natural gas demand

Gas demand is likely to grow 10 per cent in the next decade in the Further Acceleration scenario. Gas demand is projected to grow until 2035. The decline thereafter is expected to be driven by government policies to decarbonise industrial and buildings sectors.

In the current trajectory scenario, gas demand is projected to increase by 16 per cent from today before it peaks in 2040. In the Achieved Commitments scenario, the decline is expected to start in 2030.

Overall, the decline post-2030 is expected to be driven by electrification, strong renewables uptake and green hydrogen adoption in power, buildings, and industrial sectors.

The report added that gas demand in power is set to grow strongly between 2035 and 2040. It is subsequently likely to play the role of a backup to renewables.

“The global gas price rally in 2021 was supported by high gas demand due to rapid economic recovery and unexpected weather conditions, and a lower supply due to unexpected outages and underinvestment,” the report added.

Hydrogen demand

Industrial uses such as iron and steel could drive hydrogen demand growth before 2035. Road transport driven by cost-effectiveness is likely to be another source of hydrogen demand growth.

Hydrogen demand is expected to accelerate after 2035 across all sectors. Road transport and new industrial uses are expected to account for more than 50 per cent of demand growth. Refining is the only sector where demand is projected to decline after 2030.

“Announcements of new clean hydrogen production projects tripled year on year in 2021. Around 22 Mt of clean hydrogen capacity has been announced to date, approximately 15–20 per cent of what is needed by 2035,” the report added.

Timely deployment of infrastructure across the whole supply chain cost reduction and increased scale-up in renewable energy production, and government support and targeted actions will be required to support the development of a hydrogen economy.