Decarbonisation efforts may not lead to lower oil prices, Goldman Sachs says

Efforts to reduce carbon emissions have increased uncertainty about oil demand in the long run, investment bank says

A Shell refinery in Norco, Louisiana. The International Energy Agency expects global oil demand growth to slow significantly by 2028. AP

Decarbonisation and a fall in oil demand may not result in lower prices as crude supply declines in the absence of investment, Goldman Sachs has said.

Geological decline rates indicate that global oil supply would decrease by about 5 per cent annually without investment in existing or new projects, the US investment bank said in a research note on Monday.

Investors may require a premium in long-dated prices to offset investment risk due to demand uncertainty, similar to the 2000s bull market, the bank said.

Energy organisations and companies expect oil demand to grow by 800,000 barrels per day every year from 2024 to 2030, with the bulk of that growth projected to come from the Asia-Pacific region and from jet fuel and petrochemical products.

“However, these similar baseline forecasts through 2030 understate the uncertainty about long-run oil demand,” Goldman Sachs said.

“Forecasts of long-run oil demand have been revised significantly in the past. The typical forecast of the level of global oil demand in 2030 came down by nearly 12 million bpd during the financial crisis … but has stayed broadly stable since,” the bank said.

Goldman Sachs said that decarbonisation efforts have increased uncertainty related to long-term crude demand, with projections ranging from “has already peaked” to “will not peak through 2050”.

Extending the horizon from 2030 to 2045 triples the range of demand estimates to 80 million bpd, the bank said.

“We also document that long-run oil demand forecasts tend to be higher for energy agencies and energy majors with a relatively greater exposure to oil production than for organisations with a greater exposure to consumption,” Goldman Sachs said.

The International Energy Agency expects global oil demand growth to slow significantly by 2028 as high prices and supply concerns hasten the shift to cleaner energy.

Based on current policies and market trends, crude demand will rise by 6 per cent between 2022 and 2028 to reach 105.7 million barrels per day, supported by strong demand from the petrochemical and aviation sectors, the Paris-based agency said in its medium-term oil market report last month.

“We heard the story of peaking demand five years ago [and even] 10 years ago,” Suhail Al Mazrouei, the UAE’s Energy and Infrastructure Minister, said during a recent event.

Opec+, an alliance of 23 oil-producing countries, “knows better” because it represents 40 per cent of the world’s production, Mr Al Mazrouei said.

Oil and gas upstream capital expenditure rose by 39 per cent to $499 billion last year, the highest level since 2014, according to the International Energy Forum.

However, annual upstream spending needs to increase to $640 billion by 2030 to ensure adequate supplies, the IEF has said.

Last year, Opec estimated that the oil and gas industry would require investments worth $12.1 trillion in the period to 2045 to boost production and meet demand, even as the world moves to clean energy.

International oil companies have reduced spending over the past few years amid increasing pressure from governments and institutional investors.

However, Opec members such as Kuwait, Iraq and the UAE plan to raise their production of oil and gas over the next few years.

Kuwait, Opec’s fourth-largest producer, aims to raise its oil production capacity to 3.15 million bpd, from the current 2.7 million bpd, within the next four years.