McKinsey & Company downgrades its global energy demand outlook

27 July 2016

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.

Energy revolution

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.

Rusting oil barrels

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).”

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WEF finds no progress made on greening economy

01 April 2019

The reports of two influential bodies, in the space of a day, have warned that no progress is being made to prevent major climate change. The World Economic Forum has warned that greening of the global energy transition has stagnated over last five years, while the International Energy Agency has confirmed coal use rose again last year.

The position of the Academies of Science from 80 countries, plus a majority of scientific organisations that study climate science, is that humans are causing rapid climate change – often referred to as global warming. Roughly 95% of active climate researchers publishing climate papers endorse the consensus position that since the industrial revolution, the boom in carbon emissions from fossil fuel powered human activity has heavily impacted the planet, with rising levels of CO2 and other greenhouse gases trapping heat from the sun causing global temperatures to rise – something which will have catastrophic results in the near future.

Despite the steadfast consensus among the scientific community on the matter, however, there has been little to no meaningful action to avert disaster. In fact, while the signing of the Paris Accord was met with great excitement, since it came into force, global carbon dioxide emissions have continued to rise. Today, they sit at their highest levels yet, after a strong economy and extreme weather stoked a surge in energy demand last year.WEF finds no progress made on greening economyAccording to the world’s energy watchdog, the Paris-based International Energy Agency (IEA), energy spiked by 2.3% in 2018 – the biggest leap since 2010 – with that demand largely being met with fossil fuels. As a result, global emissions of carbon dioxide hit the record high of 33 billion tonnes in 2018, a rise of 1.7% on 2017’s figures. Commenting on the findings, IEA chief Fatih Birol said the rise in energy demand was “exceptional” and a “surprise for many.”

Birol added, “We have seen an extraordinary increase in global energy demand in 2018, growing at its fastest pace this decade. Looking at the global economy in 2019, it will be rather a surprise to see the same level of growth as 2018.”

The suggestion from Birol that 2018 is likely to be an anomaly which will not be seen again is strange, considering the added strain which the boom in emissions will place on the environment. To suggest that heightened energy demand was driven by extreme weather – which is increasingly difficult to claim is unrelated to man-made climate change – and then to suggest that such a thing is unlikely to occur any time soon in spite of emissions having increased seems contradictory.

Regardless of this, the bad news was further compounded within hours of the IEA’s release. A report from the World Economic Forum released on the same day concluded that the world's energy systems have not become any greener in the last five years. Despite the agreement of global climate targets, falling green power costs, and mounting public and business concern over the catastrophic impacts runaway climate change could wreak, the WEF’s damning assessment warned that little to no progress has been made on making energy systems more environmentally sustainable since 2014.

Coal is the largest hindrance of change on this front, according to the report. Recent years have seen improvements in energy access and security, but far too many nations remain dependent on coal power for the new energy systems to have made any environmental gains. At the same time, major economies have failed to decrease or even slow the amount of energy they use per unit of GDP, leaving smaller actors who have made changes micturating into a gale. Change on the part of the world’s largest economies is therefore crucial to driving the development of a greener, more efficient global economy, the WEF concluded.

Commenting on the findings, Roberto Bocca, leader of the WEF's future of energy and materials division, said urgent action is now needed to move toward decarbonisation. He added, "We need a future where energy is affordable, sustainable and accessible to all. Solid progress in bringing energy within the reach of more and more people is not enough to mask wider failures, which are already having an impact on our climate and on our societies."

The news comes even as sustainability continues to be talked about as a ‘top agenda item’ at the majority of the world’s largest corporations. While 85% say that it will be more important still in another five years, it is clear that the majority of the world’s most powerful businesses are failing to walk the talk on the matter, regardless of what governments do.