The world is gradually moving away from traditional oil & gas sources as changes in technology, consumer behaviour and sustainable necessity continue to unfold. Together, and combined, the joining of forces is set disrupt the industry, a development which has material implications for carbon energy assets and investments made today.
As the global pledge to keep global warming levels below 2.0°C, with a preferred target of below 1.5°C, is being ratified by governments around the world, global attitudes towards carbon are changing. The shift in perception, regarding the sustainability of our current energy model, is starting to affect investment decisions by a range of stakeholders, as well as consumers, some of whom are investing in distributed energy generation and electric vehicles. In addition, consumers, governments and businesses are looking critically at the waste produced in their value chains, with moves towards a circular economic model becoming more prevalent.
These changes in perception and behaviour, according to a new McKinsey & Company article, will start to make themselves felt within the carbon energy sector. What has long been a cash cow, may, according to the article, become a liability to investors as carbon energy assets become legacy assets in a world shifting towards sustainable growth.
According to the firm’s analysis, the traditional projections, the business-as-usual case, regarding energy consumption growth may no longer hold water. The article cites a number of key factors that will together lead to peak oil demand – rather than, as traditionally argued, supply. A number of macroeconomic conditions are set to take hold that will shift focus from carbon energy, as well as from energy more generally. The ageing population globally will mean that there will be fewer active workers in the long term, and as such, lower energy intensity – MGI expects growth in GDP to be lower by 40% across the coming 50 years relative to the previous 50 years. China is also shifting away from energy intensive manufacturing towards less energy intensive services, which, as a result, means lower energy demand. Increased global energy efficiency within a host of processes is also set to affect the market.
One of the areas to see a considerable effect from changes is petrochemicals. The demand for petrochemicals, historically, has grown at 1.3 to 1.4 times that of GDP. This is changing however, particularly due to the saturation of plastics in some markets, as well as changing behaviour around the use of plastics, from increased recycling (from 8% today to 20% in 2035) and more efficient use, and reduction, of plastics in packaging. The result is that in the mid-term, growth in demand for petrochemicals will fall to 1.2 times GDP, while, in the longer term, it may fall to the same level as GDP, with, as a result, a global drop of approximately 2.5 million barrels per day below the business-as-usual case.
The article also finds that demand for ICE light vehicles is set to change. Three factors are implicated in the change: electric vehicles, the sharing economy and autonomous vehicles. The electric vehicle market, according to the firm’s analysis, is set to grow markedly over the coming fifteen years; by 2030, electric vehicles (including hybrids and battery-powered plug-in vehicles) could represent close to 50% of new cars sold in China, the EU, and the US, and about 30% globally. The acceleration of electric vehicles, as well as more efficient use of vehicles due to sharing and automation, may reduce oil demand by up to 3 million barrels per day by 2035, relative to the business-as-usual case. In total, from these two factors, the total oil demand will see a peak in global demand by 2030, at less than 100 million barrels per day.
The consultancy’s revised energy case will see the demand for energy globally decelerate by 0.7% per year through 2050. The major growth drivers will be wind and solar, which represent 80% of the net added capacity and will represent, according to the firm’s current projection, 34% of global generation by 2050. Coal demand for energy will peak in 2025. Electricity demand will grow as well, among others to support the growing fleet of electric vehicles.
“The downgrading of our energy demand outlook has material implications for investments, including decisions being made today", state the researchers. McKinsey adds however that the firm's calculation include several significant sensitivities – many of which accelerate decarbonisation. "For example, our business-as-usual case would be affected by changes in GDP growth. Oil prices could decline, which could increase demand, thereby affecting the overall-demand outlook. Acceleration of technology development and adoption could alter the economics of alternatives (for example, lower electric-vehicle-battery prices). Individuals and businesses could change their behaviours (for instance, making residences more energy efficient). Changes in policies and regulations could realign incentives for suppliers and consumers (such as carbon taxation).”