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COVID-19 to weaken link between oil demand and economic growth

Oil&Gas Materials 26 October 2020 11:12 (UTC +04:00)
COVID-19 to weaken link between oil demand and economic growth

BAKU, Azerbaijan, Oct.26

By Leman Zeynalova – Trend:

The expectation that oil demand will peak around 2030 suggests that the historical relationship with GDP growth will break down, Trend reports with reference to UK-based Capital Economics research and consulting company.

“We think that the structural changes associated with COVID-19 will permanently weaken the link between economic growth and oil demand. Declining demand, ample supply and lower marginal costs should all weigh on oil prices. We estimate that the real price of Brent oil will fall to $35 per barrel by 2050.

“The medium-term impact of the COVID-19 pandemic on both global economic growth and consumer behaviour has brought forward “peak oil demand” to around 2030. As a result, we expect that real oil prices will be falling for much of the next decade and beyond.

“Although oil consumption is likely to recover in tandem with the economic revival in the near term, moves towards more homeworking and less international business travel will become entrenched, with negative implications for fuel demand. What’s more, governments providing fiscal stimulus to bolster economic growth in the wake of the virus may seize the opportunity to promote clean energy at the same time.

“Until recently, the discussion about “peak oil” was focused on the supply side and the risk that the world would run out of oil. However, the focus has since shifted to when demand will peak. Concerns about climate change have led to efforts to reduce fossil fuel use and it is now received wisdom that the transport sector will be fully electrified at some stage and that we need to find alternatives to oil-based plastic.

“Some commentators claim that oil demand may have already peaked, but we are not convinced. Oil consumption in advanced economies will recover as economic activity picks up and emerging economies still have considerable scope to increase their oil use, notably through rising car ownership. Electric vehicles (EVs) are taking market share, but they remain expensive and we think that they will not displace fossilfuelled vehicles in the immediate future.

“That said, we think that the measures to contain the virus will accelerate the move (already underway in advanced economies) towards less oil-intensive GDP growth. And though we still believe that non-OECD oil demand will continue to grow until the early 2030s, we expect that the rate of oil consumption growth will weaken in the years ahead. As a result, we forecast that global oil demand will peak around 2030,” the report says.

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Follow the author on Twitter: @Lyaman_Zeyn

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