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Future Crude Oil Demand Affected By Rising Renewable Energy Consumption

Posted: Wednesday, November 18th, 2020

Estimated Reading Time: 3 minutes

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The world goes green. Investments in renewable energy affect future crude oil demand, creating tectonic shifts in long-term investing and positioning.

Governments around the world announced in 2020 various renewable energy projects and stimulus packages in excess of $450 billion. Loans, tax incentives, rebates – you name it. All these will have a tremendous impact on the crude oil demand – a demand that already suffered in 2020 from the decline in mobility and national lockdowns.

Even major oil companies prepare for a shift in the energy mix’ componence. Following the 1970s, economic growth in major developed nations was responsible for steady crude oil demand levels. However, nowadays, the focus shifts to green projects, green energy, and even green bonds on ESG concerns.

Crude Oil Demand

What Will Oil Majors Do to Fight the Decline in Crude Oil Demand

To start with, the decline in crude oil demand in 2020 was mostly due to the COVID-19 pandemic. When the oil futures settled below zero in April, it indicated too much oil available on the market. As such, OPEC+ intervened and curbed production. Following the common policies by OPEC+ members, the price of oil recovered to $40, where it remained to this day.

Nevertheless, the 60% decline in the price of oil came on the back of low crude oil demand. Sure, the pandemic is an exogenous factor, and we should treat it as such. However, we should not forget that the price of oil dropped from above $100 in 2008 to $30 a couple of years later. Such a decline is not possible without tectonic shifts in consumer behavior and the industry.

Oil Producers To Invest in Renewable Energy?

An interesting shift in the industry appeared as early as 2018. Several oil-producing companies announced plans to reduce emissions by 2030. To do so, some major companies bought stakes in the wind and solar companies. The ones that did not, shifted to buying energy generated by wind and solar companies.

If the trend continues throughout the years, no one should be surprised to see the proportion of oil investments decline in the balance sheet of current major oil producers. After all, these are publicly owned companies focused on maximizing shareholders’ wealth.

Crude Oil Demand and the Crude Oil Price in 2025

The COVID-19 pandemic drove the oil demand down to extreme levels. Travel restrictions reduced the demand for liquid fuels.

As such, last week’s announcement that the world is close to getting an efficient vaccine sent the crude oil price higher. The reason behind the move is that the world coming back to the old normal means a stronger demand for crude oil.

Following the April move, as of early September, oil futures contracts indicated that Brent crude oil will trade around $50 by the end of 2023 (i.e., three years from now). Also, the same futures contracts suggest that the average annual price will hover around $47 in 2021.

While the pandemic was responsible for dramatic moves in the price of oil, it may be that the decline is just part of a long-term downtrend. A downtrend that signals the declining crude oil demand as the world shifts to renewable energy.

Let us not forget that British Petroleum trades at its lowest levels in 60 years. Also, Exxon was kicked out of the Dow Jones.

Unless oil majors adapt to the decline in crude oil demand, they are poised to disappoint investors.

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