Economic Report 2020

ECONOMIC REPORT 2020

Prices have seen some limited recovery in November, with the announcements of COVID-19 vaccines, causing the Brent spot price to increase by 3.7 per cent, reaching $49/bbl in late November. However, the year-to-date average of $41/bbl is still more than $23/bbl lower than the 2019 average. The modest recovery is expected to continue to 2021, with the Energy Information Administration (EIA) forecasting Brent spot prices to average of $47/bbl over the next year. It looks certain that this year will mark the lowest annual rate of demand since 2013 and the first annual decline since the impact of the financial crisis in 2009 (which resulted in a 2 per cent demand decline). Based on current policies, the IEA estimates that it will take until 2023 for demand to recover to 2019 levels and it will remain below the pre-pandemic trajectory throughout the decade. OPEC has a slightly more bullish outlook, with demand recovering to previous levels in 2022. Although a return to growth will likely be seen in the medium term, there is greater uncertainty in the longer- term outlook. The IEA predicts that growth could plateau around 2030, potentially marking ‘peak oil’ demand within the next 10 years. However, its more ambitious Sustainable Development Scenario corresponds to a situation where peak oil has already occurred in 2019. Other energy forecasts such as BP’s Rapid and Net-Zero scenarios similarly predict that peak oil demand may well have arrived. By way of contrast, OPEC is more bullish on demand with estimates of continued growth until the late 2030s,

before it plateaus at around 10 per cent above 2019 levels (110 million bpd). Despite differing demand growth expectations, all wider energy scenarios continue to reinforce the role of oil as a core part of the global energy mix in the decades to come. In advanced economies such as the UK, peak levels of oil demand have already been seen. As has been outlined, whilst the relative importance of oil in the UK’s primary energy mix has remained steady, consumption has fallen by almost 12 per cent since 2000. Nevertheless, the impact of the pandemic has still had a marked effect on the use of oil in the UK. Overall demand for oil products (crude, NGLs and feedstocks) in the first half of 2020 was 15 per cent lower than in 2019 and the second quarter marked the lowest demand on record with a year-on-year decline of more than 26 per cent. This has been driven mainly by reduced transport demand – aviation fuel demand fell by 86 per cent in the second quarter, with petrol falling by half and diesel by two-fifths. This trend resulted in the UK becoming a net exporter of oil products for the first time in 15 years – however this is a temporary event and initial indications are that recovery in demand in late summer has seen a return to net importer status. These dynamics will continue to evolve, with the Climate Change Committee estimating that UK oil consumption may need to fall by more than 80 per cent compared to 2017 by 2050 to achieve net zero. 25 However, significant policy change will be required to achieve this, and the latest BEIS Energy Reference scenario estimates that a 16 per cent reduction in demand is likely to be seen in the next two decades. 26

25 https://www.theccc.org.uk/publication/net-zero-the-uks-contribution-to-stopping-global-warming/ 26 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/931323/updated-energy-and-emissions-projections-2019.pdf

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