Chapter 8.3, Problem 125E

To determine

To work: an extended application analyzing the yearly production of an oil well over a period of 36 years.

Explanation of Solution

Given information:

Calculation:

Oil 2020 examines the key issues in demand, supply, refining and trade to 2025. This year, the report considers topics such as the impact of the new coronavirus (COVID-19) on demand; slowing supply growth in the United States and other non-OPEC countries; and the level of spare production capacity in OPEC countries to help meet demand growth. Oil 2020 looks at the interplay between the expanding US influence in global oil supply and the demand from Asia for exports from the Middle East.

At the same time, global energy transitions are affecting the oil industry: companies must balance the investments needed to ensure sufficient supplies against the necessity of cutting emissions. In a decarbonizing world, refiners face a big challenge from weaker transport fuel demand.

Outbreak of the new coronavirus (COVID-19) has added a major layer of uncertainty to the oil market outlook at the start of the forecast period covered by this report. In 2020, global oil demand is expected to contract for the first time since the global recession of 2009. The situation remains very fluid, however, making it extremely difficult to assess the full impact of the virus.

To construct a base case for oil demand in 2020, this report draws on a wide range of data sources, including initial data for transport fuel demand, the most affected sector, and recently revised global GDP estimates by the Organisation for Economic Co-operation and Development (OECD). In this base case, we assume that although the virus is brought under control in China by the end of the first quarter, the number of cases rises in many other countries. Containment measures imposed in North America, Europe and elsewhere are expected to have a smaller impact on oil demand than those in China. However, demand from the aviation sector will continue to suffer from the contraction in global air travel.

In this case, oil demand in China suffers the most in the first quarter, with a year-on-year fall of 1.8 million barrels per day (mb/d). Global demand drops by 2.5 mb/d. In the second quarter, an improving situation in China offsets deteriorating demand elsewhere. A progressive recovery takes place through the second half of 2020. For 2020 as a whole, the magnitude of the drop in the first half leads to a decline in global oil demand of around 90,000 barrels a day compared with 2019.

The arrival of the coronavirus is rattling a global oil market that was already facing challenges. On the demand side, growth in 2019 was significantly weaker than expected and new vehicle efficiency measures have started to weigh on transport fuels. Refining capacity additions in recent years have outstripped demand growth, bringing tough competition for an industry already challenged by tightening product specifications, most notably the new International Maritime Organization (IMO) bunker rules introduced at the beginning of 2020.

At the same time, the world’s oil production capacity is expected to rise by 5.9 mb/d. Non-OPEC supply will rise by 4.5 mb/d while OPEC builds another 1.4 mb/d of crude and natural gas liquids capacity. This assumes that there is no change to sanctions on Iran or Venezuela. The United States leads the way as the largest source of new supply. Given its huge resource potential, it could produce even more if prices end up higher than assumed in this report. Brazil, Guyana, Iraq and the United Arab Emirates also deliver impressive gains.

Global oil demand will grow by 5.7 mb/d over the 2019-25 periods at an average annual rate of 950 kb/d. This is a sharp reduction on the 1.5 mb/d annual pace seen in the past 10-year period. Following a difficult start in 2020 (-90 kb/d) due to the coronavirus, growth rebounds to 2.1 mb/d in 2021 and decelerates to 800 kb/d by 2025 as transport fuels demand growth stagnates.

Oil demand growth slows because demand for diesel and gasoline nears a plateau as new efficiency standards are applied to internal combustion engine vehicles and electric vehicles hit the market. Petrochemical feedstocks LPG/ethane and naphtha will drive around half of all oil products demand growth, helped by continued rising plastics demand and cheap natural gas liquids in North America.