What sector will account for the largest source of oil demand growth over the next two decades?

Most people might assume transportation, with hundreds of millions of people in the developing world acquiring cars for the first time. However, according to the International Energy Agency (IEA), the petrochemical industry will represent the largest source of additional oil consumption through 2040.

By 2040, the IEA actually sees oil demand from passenger vehicles declining, while road freight accounts for a growth of 4 million barrels per day (mb/d). Aviation adds 3 mb/d and maritime shipping adds another 1.4 mb/d.

On the other hand, the manufacturing of petrochemicals such as plastics will add 6.2 mb/d to global oil demand by 2040, according to the IEA’s New Policies Scenario, which incorporates the effects of policies from governments that have already been announced.

The debate over ‘peak oil demand’ typically comes down to how fast and how widespread the adoption of electric vehicles will be. Tesla is held up as a harbinger of the coming wave of EVs, and the flurry of announcements from incumbent automakers to switch over to EVs is cited as proof that peak oil demand is near.

But there is a case that the real debate should be over plastics and how much the petrochemical industry continues to grow.

The IEA notes that historically, the increase in the consumption of plastics tends to track GDP growth, and that link has been pretty tight even as the correlation between primary energy consumption and GDP has started to decouple in recent years. Related: Can Norway Survive Without Big Oil?

The IEA predicts that the demand for high-value chemicals such as ethylene, propylene and aromatics will grow by 60 percent between 2016 and 2040 to 560 million tonnes. Moreover, that could understate the potential growth rate—if new innovations in the chemical industry attract a deeper switchover to plastics from woods and metals, then oil consumption in petrochemical industry will grow by even more.

In addition, the threat to oil from the greater adoption of EVs is undercut by the relative greater use of plastics in EVs compared to conventional vehicles.

Overall then, the highly-anticipated peak of oil demand may prove elusive if the petrochemical industry continues to expand at such an unbridled rate. The IEA believes petrochemicals alone will more than offset the oil demand loss in passenger vehicles from EVs.

There are, however, threats to petrochemical demand as well. The IEA noted in its World Energy Outlook that China has made significant investments in coal-to-olefin and methanol-to-olefin (CTO/MTO) processes, which would allow China to use its coal reserves to produce plastics rather than depend on imported oil. This, however, is probably not going to be the dominant story going forward, with serious questions about both the economics and the environmental impact.

On the other hand, there are plant-based alternatives that are starting to gain attention. The consumption of bioplastics made from sugar cane, wood and corn could jump by 50 percent over the next five years, according to the European Bioplastics Association, cited by Bloomberg. “Biochemicals and bioplastics could erode a portion of oil demand, much like recycling can erode overall virgin plastics demand,” Pieterjan Van Uytvanck, a senior consultant at Wood Mackenzie, told Bloomberg. “Provided the challenges facing biomass today are overcome, it will become a larger portion of the supply.”

Still, bioplastics are growing from a small base, controlling only one percent of the market. The IEA argues that the growth of bioplastics will be “largely determined by the cost competitiveness of the production process and by the future availability of biomass feedstock.”

Bioplastics are more expensive than traditional petroleum-based plastics, and the IEA says that price parity will be hard to achieve without technological breakthroughs. At the same time, the feedstock might be used elsewhere – sugar cane in ethanol, for example. That could challenge the availability of the feedstock for bioplastics.

The IEA sees more potential in the less-sexy practice of recycling and efficiency. For instance, if recycling increases from 15 percent to 33 percent, and if end use plastic consumption were reduced by five percent through ‘light-weighting’ (reducing the weight of products, and thus using less plastic), it could eliminate roughly 1.5 mb/d of oil demand by 2040. Bloomberg Intelligence estimates that it takes 8.5 barrels of oil to manufacture 160,000 plastic bags.

But plant-based materials have the advantage of smaller carbon footprints while also being able to naturally biodegrade, a non-trivial benefit considering the country-sized mountain of plastic in the Pacific Ocean.

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However, the IEA still sees a minimal impact on oil demand from bioplastics for the next two decades due to higher costs.

The IEA has obviously been wrong before and could be underappreciating the potential of bioplastics. Bloomberg profiled several companies working on different alternatives, including Coca-Cola, BASF and Stora Enso. Many of them are confident that costs will come down as the bioplastics industry matures.

The oil industry is obviously keeping an eye on the situation. With EVs threatening to eat into the demand for oil in the transportation sector, the best bet for Big Oil is to get into petrochemicals. Bioplastics, in turn, would hit oil companies on that front as well.

“Attitudes are evolving,” David Eyton, the head of technology at BP Plc, said in a Bloomberg interview. “The question that faces the petrochemicals industry that has yet to really be answered is, ‘How are people going to deal with some of the environmental impacts of petrochemicals? Particularly plastics, which are a growing concern.’”

By Nick Cunningham of Oilprice.com

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