Prepare for peak oil, but GCC has no need to panic

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The energy transition has been a hot topic in recent weeks, prompted by the International Energy Agency’s assertion that peak oil demand could take place this decade.

What will such a tipping point mean for the GCC economies, which are still heavily dependent on hydrocarbons? Opec+ production cuts have already slashed growth expectations for this year.

Oxford Economics’ latest forecasts show GDP growth across the GCC averaging only 1.2 percent this year and 3.8 percent next year on the back of lower oil production. This follows growth of 7.6 percent in 2022.

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We have also brought forward our forecast for a peak in world oil demand to 2027. Our previous projection anticipated that demand would start to decline from the mid-2030s.

The major change has been to projections for gasoline demand, owing to an increase in sales and therefore stocks of electric vehicles, displacing internal combustion engines.

Robust growth in electric vehicle (EV) sales, underpinned by various policy initiatives, now seems increasingly likely. By 2050, EVs will account for around 70 percent of all light vehicle sales.

So, gasoline’s share of refined products demand is forecast to be around only 7 percent in 2050, down from 16 percent in 2019. 

Looking for balance

Over the long run, the oil market needs to balance. Thus, peak oil demand also necessitates peak oil supply.

However, Oxford Economics forecasts that oil demand will remain above 2019 levels until 2030 and still be nearly 90 percent of this value by 2050.

So, there is still a market to be served, especially when other suppliers such as Russia, Canada, Norway and the UK will see production fall.

Higher-cost producers that have not invested in production will lose out most following peak oil demand. Those suppliers sitting low down on the cost curve, which have invested in expanding capacity, will benefit.

Opec, and in particular Saudi Arabia and the UAE, will continue to increase output and market share; Russia will lose out. The US will remain a net exporter of crude oil.

Saudi Arabia is expected to account for 16 percent of world oil supply by 2050, compared with 12 percent in 2019. Opec will account for 47 percent, up from its present share of 38 percent.

There is a considerable degree of risk to the outlook. Policy is constantly evolving and could accelerate the green transition, resulting in a sharper fallback in oil demand.

However, even in a scenario that results in net zero carbon emissions by 2050, the hydrocarbon sector can support growth and diversification in the UAE, Saudi Arabia and across the GCC.

In such a scenario, production in Saudi Arabia, which has a relatively low average cost base, continues at a similar level to current production. And Saudi Arabia and other GCC producers will capture a larger share of the shrinking market.

In the face of steeply falling oil demand in a net-zero scenario, we expect high-cost producers to see the most rapid declines.

In contrast to Saudi Arabia’s shallow conventional oil wells, obtaining crude from Canada’s oil sands requires a much more energy-intensive mining and extraction process.

The relatively short life of US shale wells leads to high breakeven costs, so US production is also relatively hard hit.

Time to adjust

Gulf governments have time to pursue growth and diversification, but this should not breed complacency.

GCC producers will not escape unscathed as the world turns away from oil. Oxford Economics forecasts oil prices to be around $100 per barrel in 2050, which is roughly $60 per barrel in today’s prices.

In a net-zero-by-2050 scenario, oil prices are likely to be some $40 per barrel lower than in our baseline forecast.

Given the exposure of GCC government budgets to oil prices, even the lowest-cost producers will feel the impact of net zero policies. Government revenues across the GCC would run substantially below current expectations.

These forecasts of peak oil demand should not alarm GCC policymakers for now because they have time and financial means to transform their economies.

The window of opportunity to implement the right strategies is narrowing as the world starts to learn to live without oil.

Scott Livermore is chief economist at Oxford Economics Middle East