President Biden's suggestion that oil will be needed for "at least a decade" looks like an understatement

Ed Crooks
Vice-Chair, Americas, Wood Mackenzie

President Joe Biden’s State of the Union Address, delivered to Congress on Tuesday evening, was a rambunctious affair, punctuated by cheers and boos and occasional shouts of “liar!”. Several observers commented that it felt more like the knockabout of a UK Prime Minister’s Question Time than the respectful hearing usually given to US presidential speeches.

It was the debt ceiling and the future of Medicare and Social Security benefits that sparked the most lively exchanges, but there was also a raucous response to some of President Biden’s comments about energy.

“Have you noticed: Big Oil just reported its profits. Record profits,” the president said. “Last year they made US$200 billion, in the midst of a global energy crisis. I think it’s outrageous. Why? They invested too little of that profit to increase domestic production.”

He then departed from the prepared text of his speech, adding: “And when I talk to a couple of them, they say: ‘We’re afraid you’re going to shut down all the oil wells [and] all the oil refineries anyway, so why should we invest in them?’ I said we’re going to need oil for at least another decade.” That timetable was met with derisive laughter from some parts of the chamber, and President Biden qualified his remark, adding: “And beyond that. We’re going to need it.”

The president’s ad lib identified an issue that is frequently raised in the US oil and gas industry. When people complain about the impact of the administration, there are often not many specific policy measures that they will point to. In the first two years of the Biden presidency, the pace of permit awards for drilling on federal lands was in line with the first two years of the Trump administration. Federal lease sales for oil and gas development had slowed sharply, but the pace has picked up as mandated by the 2022 Inflation Reduction Act.

More than any of those detailed questions, the issue that seems to come up most often in conversations with oil and gas producers is what they see as an unacknowledged contradiction in the administration’s position. President Biden has been urging the industry to increase production of both crude and refined products in the short term, while remaining committed to a fundamental shift away from fossil fuels to achieve net zero greenhouse gas emissions by 2050.

Hence the conversations that President Biden quoted in his speech. Industry leaders wonder why they should make investments in oil production and refining capacity, if they are going to become stranded assets in just a few years.

The president’s attempted reassurance that the US would still need oil for at least ten more years does not help much for potential investments in assets that could have economic lifetimes lasting multiple decades.

However, forecasts suggest that the US will continue to use oil well beyond a decade from now. In Wood Mackenzie’s base case, US oil demand hits a plateau in the mid-2020s before starting to decline around the end of the decade. But by 2050 it is still running at about 13 million barrels per day, down only about 35% from this year’s levels.

US gasoline demand may have already peaked. Increasingly fuel-efficient engines and the rise of electric vehicles mean the US will probably never again use as much gasoline as it did in 2016-19. In our base case forecast, we project US gasoline demand will drop by about 5 million b/d by 2050, as EVs, including autonomous EVs, rise to 85% of light vehicle sales.

But that will still mean a few million new internal combustion engine and hybrid vehicles being sold each year. And past sales will mean that about a third of the fleet of cars in use in 2050 could still be gasoline-fueled. That would be enough for about 4m b/d of gasoline demand.

Gasoline, which accounts for about 44% of US consumption of oil products, is one of the market segments where demand can be expected to decline the fastest, because there is a competitive alternative in passenger EVs. For other uses of refined products, such as heavy freight transport and aviation, the alternatives are generally at earlier stages of development and deployment. We expect EVs to take about 28% of passenger vehicle sales in the US in 2030, compared to a share of just 8% for heavy trucks.

With no alternatives currently available at scale, jet fuel demand is likely to keep rising out to the 2040s. Production of Sustainable Aviation Fuel, using vegetable oils and animal fats as feedstocks, is set to soar. But in our base case it still meets only 16% of US demand for jet fuel in 2050.

The overall result is that total US demand for oil products is likely to remain resilient, on a gently downward sloping trend.

It is possible to model faster rates of decline. Wood Mackenzie’s Accelerated Energy Transition 1.5 °C scenario, showing a world consistent with limiting global warming since pre-industrial times to 1.5 °C, includes a steep fall in world oil demand to about 33 million b/d by 2050.

In that scenario, US oil consumption drops very sharply, although even then there is some residual demand. The scenario projects the US using about 4m b/d in 2050, mostly ethane and LPG for petrochemical feedstocks, with small amounts of diesel, gasoline and jet fuel.

Moving the world on to that pathway would require a colossal effort of global policy. Bill Gates, the Microsoft founder who now works on climate change, warned recently that he saw “no chance” that global warming could be limited to 1.5 °C. At Wood Mackenzie, we believe a pathway to 1.5 ˚C is still possible, but it would have to be achieved with rapid adoption of hydrogen and carbon capture technologies, as well as efficiency gains.

So when President Biden talks about the US needing oil “for at least another decade”, it’s not particularly controversial to suggest that that is a significant understatement of how long demand is actually likely to persist.

The more interesting question, perhaps, is how does the era of slowly but steadily declining demand, which we are likely to enter quite soon, affect the US industry?

Matt Kimmel, Wood Mackenzie’s principal analyst for refining and oil markets research, suggests one answer is going to be an increasing export orientation. Latin American oil demand is projected to grow into the 2040s in our base case, even as US demand falls, and US producers both Upstream and Downstream are likely to increasingly serve those and other world markets.

US crude and products exports have soared over the past decade. Last November they hit another new record at 9.9 million b/d, of which about 4m b/d was crude. US producers have for a long time had to pay attention to global conditions, because they are price-takers in world markets. As export sales continue to grow, scrutiny of other countries’ policies, as well as the administration at home, will become increasingly important.

In brief

The veteran investigative journalist Seymour Hersh, who has a chequered record in terms of the accuracy of his stories, has published a lengthy article claiming that it was the US, with support from Norway, that blew holes in the Nord Stream gas pipelines in the Baltic last September. The report is based mainly on a single unnamed source, said to have “direct knowledge of the operational planning”. The White House described the report as “complete fiction,” while the CIA said it was “completely and utterly false.”

While there is clearly still a great deal that we don’t know about this incident, one crucial aspect of Hersh’s story — the supposed US motive for sabotaging the pipelines — seems flawed. He argues that “President Joseph Biden saw the pipelines as a vehicle for Vladimir Putin to weaponise natural gas for his political and territorial ambitions” in Europe, and was determined to stop that. But by September 2022, when the blasts happened, Russia had already stopped flows through Nord Stream, claiming it was unable to operate the pipeline because of the West’s sanctions on critical equipment that required maintenance. There was consensus among commentators and politicians that flows were unlikely to resume.

Blowing up Nord Stream did not really change the outlook for European gas markets. One thing it did do was provide a more solid justification for Gazprom’s argument that it was unable to supply contracted volumes to Germany. And that is something that will weigh in future arbitration of damages claims from European utilities.

bp became the latest oil and gas Major to report record-breaking earnings. Wood Mackenzie analysts noted that the main news coming out of the results call was an ad hoc strategy update: BP dialled back its goals for reducing oil and gas production and Scope 3 emissions by 2030. The news was welcomed by investors: bp shares rose 8% on the day.

Vestas, the wind turbine company, has announced a new process that it says will make it possible for the first time to recycle epoxy-based turbine blades.

Two leading utilities in Connecticut have been talking to state legislators about potential energy market reforms, following steep rate increases at the start of the year. James Daly, vice president of energy supply at Eversource, one of the two utilities, was quoted as saying there was “a lack of natural gas supply in the northeast, which is contributing to high prices the region is experiencing.”

The first shipment of Australian coal to reach a Chinese port in more than two years arrived this week, as an unofficial ban imposed in 2020 was lifted.

Elon Musk said Tesla would present “Master Plan 3, the path to a fully sustainable energy future for Earth” at its next investor day on March 1.

And finally: the energy industry is familiar with big dreams, but even by those standards this is quite something. A tech executive and engineering professor recently published an academic paper floating the possibility of what they call the “Yellowstone Caldera Volcanic Power Generation Facility”: a giant geothermal power plant that would use the heat from the supervolcano in Yellowstone National Park. The authors suggest the plant could generate 11,000 terawatt hours of electricity a year, equivalent to a power output of about 1.3 terawatts. As the authors say, that would be enough to power the entire US. They admit, however: “There is no question that this entire project, including facility construction, as well as the upgrade for the power distribution network, would cost trillions of dollars.”

KeyFacts Energy Industry Directory: Wood Mackenzie