Long-Term Oil Demand to Remain Strong – A Bullish Indicator
The rise of electric vehicles has prompted many analysts to start trying to pinpoint the year in which global oil demand will peak and start to decline irreversibly in the face of electrification and improved vehicle efficiency. While forecasts range from “in a decade” to “not in your lifetime,” transportation above ground — not the ‘flying cars’ hype, but airline travel — is expected to continue to grow for decades to come.
Air carriers use a middle distillate of oil — jet fuel — and as far as demand for air travel goes, jet fuel demand will be the fastest-growing transportation fuel at least until 2050, because current forecasts by international agencies only try to predict oil demand until that date.
On the one hand, global demand for air travel is set to grow with increased globalization and leisure travel, as well as with the expanding middle class in emerging economies with higher income to spend on business and tourism travels by plane. On the other hand, unlike with EVs, currently there aren’t viable alternatives to jet fuel that are cost competitive and feasible on a commercial scale. So the fuel for growing airline traffic will come from a middle distillate of crude oil.
Airline traffic figures for 2017 are in, and they show high passenger traffic demand, with economic growth picking up globally. Air cargo demand was also strong on the back of robust global demand for manufactured goods.
According to the United Nations specialized agency, the International Civil Aviation Organization (ICAO), a new record of 4.1 billion passengers were carried by the aviation industry on scheduled services last year, up by 7.1 percent compared to 2016. More than half of the world’s 1.2 billion tourists who traveled across international borders in 2017 were transported by air, ICAO said.
Global passenger demand rose 7.6 percent in 2017 compared to 2016, well above the 10-year average annual growth rate of 5.5 percent, said the International Air Transport Association (IATA) that represents 280 airlines in 120 countries. Air freight demand increased 9 percent in 2017 — the strongest growth since 2010 and more than double the 3.6-percent annual growth from 2016, according to IATA.
Despite the rise in crude oil prices in recent months and the higher jet fuel prices that could soon translate into higher airfares, air travel is set to grow in the foreseeable future, both in mature and emerging markets.
This will drive jet fuel consumption to grow at a higher rate than any other fuel for transportation in the next few decades.
“Jet fuel consumption grows more than any other transportation fuel over the projection period, rising 64% from 2017 to 2050, as growth in air transportation outpaces increases in aircraft energy efficiency,” the U.S. Energy Information Administration (EIA) said in its Annual Energy Outlook 2018 with projections to 2050, published last week.
To compare, increases in fuel economy standards “temper growth in motor gasoline consumption, which decreases by 31% between 2017 and 2050,” the EIA says. Motor gasoline and distillate fuel oil’s combined share of total transportation energy consumption is expected to drop to around 70 percent in 2050 from 84 percent in 2017 as the use of alternative fuels increases.
Not only is jet fuel demand expected to grow the most among petroleum products, this fuel doesn’t have a commercially viable competitor, and with the huge costs of aircraft and aircraft engine construction compared to car manufacturing, there aren’t too many enthusiasts to experiment in this genre.
“Jet buyers are more reluctant to experiment, since they have a lot more to lose if there is a problem with the engine,” John Auers at refining consultancy Turner, Mason Co. told The Fuse.
Unlike in ground transportation, aviation has no near-term alternative to liquid hydrocarbon fuels, and electric commercial aircraft are unlikely before 2040, IATA said in a fact sheet on alternative fuels in December 2017.
“Currently, a number of alternative jet fuel production pathways are more expensive than fossil Jet A/A1,” the association said.
So fossil jet fuel demand will continue to grow with air travel demand, and should support global oil demand even in 2050. – Tsvetana Paraskova
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