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Wednesday, December 13, 2017

Long-term uncertainties for oil demand?

Before investing in a new tanker, which may last for 25 years, it may sometimes be useful to try and imagine the world 25 years on.

 

Such an exercise may start by reflecting on the 25 years that have just gone by, which started for tanker shipping with a period of deep depression, lay-up and comprehensive sales for decommissioning, and went on to include wars in the Middle East - the Iran/Iraq wars, the Iraqi attack on Kuwait and the occupation of Iraq - in addition to hostilities in West Africa, Latin America, and even in Europe. The world economy has been strong in recent years, having recovered from recession in Japan, crisis in Asia, the doldrums in Europe, and the bursting of the IT stock market bubble.

 

During that period, there have also been substantial changes in regulations, with single hull phase-out first implemented in the U.S. and later in three versions of MARPOL. At the same time the world has become digitalised, with home computers and mobile telephones available to most people, at least in the developed world.

 

However, while oil demand and tanker transportation have increased virtually every year since 1985, when demand for tanker transportation bottomed out and sales for decommissioning were record high, oil was still 36% of the energy mix in 2005 – just as it was in 1985. The increase in consumption over the period was some 37%, leaving the tanker fleet in a strong position.

Before investing in a new tanker, which may last for 25 years, it may sometimes be useful to try and imagine the world 25 years on.

 

Such an exercise may start by reflecting on the 25 years that have just gone by, which started for tanker shipping with a period of deep depression, lay-up and comprehensive sales for decommissioning, and went on to include wars in the Middle East - the Iran/Iraq wars, the Iraqi attack on Kuwait and the occupation of Iraq - in addition to hostilities in West Africa, Latin America, and even in Europe. The world economy has been strong in recent years, having recovered from recession in Japan, crisis in Asia, the doldrums in Europe, and the bursting of the IT stock market bubble.

 

During that period, there have also been substantial changes in regulations, with single hull phase-out first implemented in the U.S. and later in three versions of MARPOL. At the same time the world has become digitalised, with home computers and mobile telephones available to most people, at least in the developed world.

 

However, while oil demand and tanker transportation have increased virtually every year since 1985, when demand for tanker transportation bottomed out and sales for decommissioning were record high, oil was still 36% of the energy mix in 2005 – just as it was in 1985. The increase in consumption over the period was some 37%, leaving the tanker fleet in a strong position.

 

What could change ongoing developments in the oil and tanker markets? The world economy looks strong and resilient and the International Energy Agency's (IEA's) long-term forecast for the oil market looks positive for the tanker industry. High oil prices above USD 30 per barrel in real terms prevailed in the period 1974 to 1987, followed by a real oil price below USD 30 per barrel in the period 1988 to 2002, and an increase to above USD 50 per barrel in the last 2-3 year period.

 

However, along with the relatively high oil prices, there is an increasing focus on energy security and on carbon dioxide emissions, which could change the situation for the oil and tanker industry. U.S. President Bush has stated that the U.S. should reduce gasoline consumption, other countries have stated that they aim to reduce their dependency on oil, and Europe wants to cut greenhouse gas emissions by 20%. It is difficult to see how countries can reduce greenhouse gas emissions without also reducing their oil consumption.

 

Not helping to improve these negative factors, China will be obtaining more oil from Russia by pipeline, at the same time as its massive programme for building coal-fired power stations will result in reduced demand for gas and oil for electricity production. Moreover, continuing high oil prices may act as a stimulus for the development of technology to reduce oil consumption.

 

Contact: Erik Ranheim