Just over a month ago, US President Joe Biden made an impassioned plea to OPEC and its allies to do more to support the economic recovery by increasing production to drive down oil prices and reduce costs for consumers.
The Administration has also pressed the oil group that oil production cuts made during the pandemic should be reversed as the global economy recovers to provide lower prices for consumers.
Predictably, Opec+ members were not stirred by the need to temper their own economic policy to benefit US consumers.
While engaging with Opec members during periods of higher prices is normal for US Presidents, Boston Consulting Group (BCG) expects in the coming months and years that several factors will inevitably converge to bring higher prices for consumers.
See: OPEC+ deal fails; oil market now faces tight supplies and rising prices
During this period, the world will likely contend with one last oil boom before the energy transition begins to bite at oil demand and keep prices from reaching such lofty heights again.
Shifting market pressures point to a final boom
The Covid-19 crisis is where it all starts. The pandemic has created the conditions that make a boom in oil prices a strong possibility over the next two years. The rollout of national vaccination programs, and the eventual ebbing of Covid’s worst health impacts, are already unleashing huge pent-up demand for oil in key areas of the global economy, with this summer recording global demand growth in two months what historically has taken three years.
This surging demand will coincide with a supply shortfall after producers cut capital expenditure sharply as prices fell last year. In the near-term, this has been further impacted by extreme weather disrupting major supply areas in the US and Gulf of Mexico.
China’s much-discussed plans to auction a portion of its crude oil reserves in order to temper price rises may stabilise prices temporarily, but it remains to be seen whether such acts go beyond market message to real market impact.
As a result, the next supercycle will likely occur on a compressed time scale, relative to prior oil price booms that usually took more time to develop. This rapid rise will put pressure on both suppliers, who will expand capital expenditures to meet rising demand, as well as end users, who will leverage efficiency as well as the new technologies increasingly available to mitigate or even avoid oil prices and their attendant emissions.
The coming boom could also be over quite quickly — 18 months at the most — and, arguably more critically, could be the world’s last. The oil market system continues to become more flexible, with both supply and demand more elastic than in the past, making booms both less likely to occur, and lower in terms of the peak price during the boom.
Energy transitions are also underway as policy makers and companies seek to curb emissions and tackle climate change, slowing the demand growth rate. And higher prices, even if they last for short periods of time, will spur further investment in alternative fuels and will accelerate any move away from fossil fuels.
We can already see evidence of the accelerating energy transition in Singapore. Solar panels are generating increasing volumes of power, with plans to boost domestic solar production five-fold by 2030. Low-carbon power purchase agreements are unlocking regional green energy. At the same time, innovations in areas such as hydrogen seek ways to diversify energy supply.
Southeast Asia’s oil demand declined 13.7% last year, with Indonesia down 24.4%, much greater than the global average decline of 9.3%, and well above the non-OECD average of 6.5%. A similar story holds if you look at the individual fuels, with jet fuel demand in the region down 45% as flights declined and the relatively smaller size of many Southeast Asian countries did not allow for still relatively robust domestic travel, as was seen in China, the US and other geographically large countries.
Southeast Asia oil demand
Demand for oil-based marine fuel is also likely to reduce in the long term as marine transport becomes more efficient. As the world’s largest bunker fuel market, Singapore is likely to play a significant role in that element of the ecosystem.
While marine fuel sales enjoyed a relative boost y-o-y in 2021, the guiding trajectory is still likely one of enhanced efficiency and reduced overall demand, framed by a landscape of increased emissions regulations.
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Overall oil demand is unlikely to be permanently gone in Southeast Asia, given the relatively minor changes in mobility and other fuel uses in the region. Hyundai’s recent announcement to establish an electric vehicle (EV) manufacturing facility in Singapore for example is a symptom of a changing world, but not one which will transform the region immediately.
Instead, oil demand will likely bounce back as mobility returns with a lifting of lockdown policies and with it, the robust economic growth that has already begun. But this is likely to coincide as the world approaches the high point of the last oil boom.
More of the recovery will likely be spent on fuel rather than invested in new construction, businesses and education. For consumers, companies and governments, it is time to prepare for both the period of high prices, but also work towards the energy transitions needed to reduce the region’s exposure to the volatile nature of oil prices.
Asheesh Sastry is the managing director and senior partner, SEA Leader for Energy, Boston Consulting Group while Jamie Webster is the Center for Energy Impact (CEI) Senior Director, Boston Consulting Group