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COVID-19 Could Accelerate The Arrival Of Peak Oil Demand

Tsvetana Paraskova

Until three months ago, the oil industry was pinning its hopes on aviation, alongside petrochemicals, for continued growth in oil demand for at least another decade.  

The aviation industry, however, was dealt a near-deadly blow by the coronavirus pandemic, which upended all plans for fleet utilization for years to come. Airlines and aircraft manufacturers do not expect global airline traffic to return to 2019 levels for several years, while air carriers are set to retire the older, larger, less fuel-efficient aircraft earlier than planned.

This could speed up the arrival of peak oil demand, considering that jet fuel demand—albeit with a small overall share of oil demand—was expected to be the key driver of oil demand growth over the next two decades, alongside petrochemicals.  

The crisis in the aviation industry and the early retirements of older wide-body planes suggests that the expected growth in global jet fuel demand through 2040 may not occur, Bloomberg Opinion columnists Liam Denning Brooke Sutherland write.

According to BP’s latest oil demand outlook through 2040, aviation and marine transport were set to account for nearly half of the increase in energy used in transport in the 2030s, even though their combined share of total transport demand today is only 20 percent. Aviation was also expected to be the key growth driver of oil use in transportation through 2040, rather than road transport.  

Before the pandemic, the oil industry, in general, had this message to all those who were arguing peak oil demand is imminent and would occur this decade—“oil demand is not gasoline only, so jet fuel demand and petrochemicals will give us license to operate for decades to come.”

Now the crisis in the aviation industry has upended the assumption that jet fuel demand growth could stave off peak oil demand for at least a decade and a half.

“The retirements are going to be significant,” and investments by airlines will continue to be made to get more fuel-efficient airplanes, Boeing CEO Dave Calhoun told CNBC this week.

“Replacements will not be uniform as airlines will focus on the oldest and least efficient to retire,” Calhoun told analysts at Boeing’s earnings call on Wednesday.

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Currently, passenger traffic in the U.S. is down 95 percent compared to a year ago, Calhoun said, noting that airlines are cutting operations dramatically.

“As they assess their businesses, they’re making difficult decisions that result in grounding fleets, deferring airplane orders, postponing acceptance of completed orders, and slowing down or stopping payments,” Boeing’s top executive said.

“We believe this industry will recover but it will take two to three years for travel to return to 2019 levels and it will be a few years beyond that for the industry to return to long-term growth trends,” he added.

According to IAG, the owner of British Airways, “Recovery to the level of passenger demand in 2019 is expected to take several years, necessitating Group-wide restructuring measures.”

So far into the pandemic, jet fuel was the oil product with the largest decline in demand relative to 2019, the International Energy Agency (IEA) said in its Global Energy Review 2020 report this week.   

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Rystad Energy also sees jet fuel demand being hit the hardest, assuming as a base case that “the common summer air travel peak will not occur at all this year.”

Jet fuel demand globally is set to plunge by 33.6 percent on the year in 2020, or by at least 2.4 million bpd from last year’s demand for jet fuel of about 7.2 million bpd, Rystad said in its latest assessment on oil and fuels demand this week.

Despite the fact that jet fuel demand overall represents around 8 percent of ‘normal’ annual global oil demand, jet fuel demand was widely expected to support the growth in oil demand through the next decade at the very least, also because jet fuel transportation is not threatened by electrification the way road transportation is.

But the global crisis following the pandemic, the crisis in the aviation industry, and expectations that people and companies could permanently change their behavior in a post-virus world are throwing all previous assumptions away. A complete overhaul of the aviation industry and a lasting change in air travel habits and patterns could indeed accelerate the arrival of peak oil demand.

By Tsvetana Paraskova for Oilprice.com

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