Midway through 2024, the global oil market is mired by persistent concerns about sluggish demand.
Data from government agencies indicate stocks of refined products, especially diesel, accumulated during Q2. Analysts have attributed the weak fundamentals to scant demand for heating oil last winter and lacklustre macroeconomic activity in China and parts of Europe. Refinery margins for gasoline and diesel have held at $20–30/bl, down to levels seen prior to 2022.
But the market should not expect lax fuel market conditions to persist. Within just four years, the world will confront a significant shortage of diesel and jet fuel; gasoline will also face shortfalls unless electric vehicle (EV) adoption surges much higher than current trends indicate.
The shortage looms because of three industry trends: first, annual additions to global refinery capacity are set to slow, especially after accounting for unit closures; second, yields are shifting from transport fuels in favour of petrochemicals, particularly in China; and third, most importantly, transport fuel demand will rise faster than consensus expects.
Fashionable peak demand mirage
Contrary to conventional wisdom, global oil demand will not peak around 2030. Rapidan’s ten-year Rapidan Oil Outlook shows global liquids demand will rise by 0.8–1.3% annually, reaching 110–116m b/d in 2033, depending on the assumed rate of EV penetration.
The “peak demand” debate concerns transportation fuels—gasoline and diesel, and to some degree jet fuel—and hinges on outsized rates of efficiency gains in the internal combustion engine fleet and EV penetration.
Rapidan’s extensive research and evaluation of global transportation sector policies strongly indicate that fuel efficiency mandates will not compel the demand destruction for oil that the consensus assumes.
Any accelerated internal combustion engine (ICE) fleet efficiency rates will require, firstly, consumers to reverse their growing preference for large vehicles; secondly, higher new model year efficiency gains; and/or, thirdly, mass hybridisation—and there is no sign that any of those trends are taking place.
Moreover, Rapidan’s ongoing evaluation of policymaking finds that, while officials will implement mandates that merely nudge EV uptake or induce consumers to buy EVs with subsidies, they will not force consumers into cars they do not want to buy nor impose high compliance costs on OEMs to do so.
Any rapid, mass-market transition to EVs must be consumer-led rather than forced by government policy.
Rapidan assesses OECD automobile fuel efficiency standards to be weak. Many contain implementation loopholes that create a gap between technical compliance and actual demand destruction.
While standards generally tighten beginning in 2027, they are at risk of political and judicial walkback, especially if low consumer demand pushes compliance costs higher.
Preferences will shape demand patterns
As a rule, while elected officials may subsidise preferred behaviour, they will not compel citizens to buy vehicles they would not otherwise choose to buy.
- Consumers value size, safety, and other attributes above fuel economy, except when fuel prices are high. Consumer preferences in the US have trended toward larger, less fuel-efficient vehicles for the last decade, with light trucks at 60% of light-duty vehicle (LDV) sales.
- At the same time, less-efficient SUVs continue to make gains in the passenger car market, capturing 45% of the global market in 2021. Per EIA, while Corporate Average Fuel Economy standards rose by 17% from 2013–20, new US on-road LDV miles-per-gallon rose by only 5.5% during the same period.
- There are no signs either trend will change soon, as even the EIA expects light trucks to capture c.70% of new US LDV sales in 2033, and the IEA expects SUVs to capture 80% of passenger car sales by 2040.
- Regarding ICE efficiency, the greatest increase potential comes from mass ICE hybridisation (traditional or plug-in hybrid). However, a tradeoff is required: the higher the battery electric vehicle penetration, the lower the impact of ICE hybridisation.
Prospective ICE bans or EV mandates on the books in the US and Europe are at risk of delay or softening if forecast consumer preference for these solutions does not emerge.
FIG.1: RAPIDAN ENERGY SCENARIO DESCRIPTIONS, M B/D
| Scenario 1: Fast EV adoption, announced closures | Scenario 2: Slow EV adoption, announced closures | Scenario 3: Fast EV adoption, additional closures | Scenario 4: Slow EV adoption, additional closures | |
Four scenarios
Rapidan recently modelled four scenarios that considered two main variables: fast versus slow adoption of EVs, and refinery closures at already announced rates versus an accelerated path (see Fig.1).
The findings suggest that a transportation fuel crunch is coming, and even with mitigations available to the refining sector, demand is likely to exceed supply within four years.
Three of the four scenarios set the world on a course for a global transportation fuel deficit by or before 2028.
Two of the three deficit scenarios present substantial (1.2–1.7m b/d) shortfalls and can only be partially addressed via higher prices that incentivise refiners to run hard enough to deliver the goods. This outlook is constructive for both diesel and gasoline crack spreads in 2026–28.
But even with higher utilisation rates, some gaps (200,000–600,000b/d) will remain between demand and supply of the main three transport fuels: gasoline, diesel and jet fuel (sometimes known as the ‘T3’).
Only one of the four scenarios yields an outcome in which supply of T3 fuels is adequate to meet forecast demand. This outcome requires both massive adoption of EVs and refinery closures that do not exceed announced plans—any other combination will require steep price increases that still leave some demand unmet.
Mechanisms to narrow the gap
Refiners will have three main options in the medium term for adjusting commercial decisions to the new gap reality: adjust product yields, postpone planned closures, and/or increase utilisation.
In terms of the efficacy of these options, there is limited potential to shift yields more towards T3 fuels, as closures predominantly impact T3 optimised capacity while the majority of capacity expansions are directed towards petrochemicals production. In short, refiners are ‘zigging’ heavily toward petchems when they should be ‘zagging’ toward T3.
On the second option, some refiners could postpone closures as fuel imbalances grow and margins incentivise continued operation, but policy imperatives will limit this option. European units will likely be closed as planned given their economic disadvantages due to increased environmental costs, while China will implement its plans to shutter its small teapot refineries. The closure of a major US refinery next year also appears confirmed.
And as for increasing refinery utilisation, this approach could supply up to 1.0m b/d of incremental T3 fuel supply, but that will not be enough to fully close the gap in the third and fourth scenarios. Global refinery capacity utilisation stands at c.80% of 102m b/d nameplate capacity, but usable spare capacity is less than the notional 20m b/d. Refiners in Latin America and Africa run at very low utilisation rates because many assets are dilapidated.
It will therefore fall to refineries—particularly newer ones—in the US, China and Middle East to help close the gap—assuming that refinery margins will sufficiently incentivise higher run rates.
Clay Seigle is the director of Rapidan Energy Group’s global oil service
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