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What goes up must come down: Understanding fluctuating oil and gas demand

They say that change is the only constant, and that’s especially true in the oil and gas industry. In the past year alone, we’ve witnessed changes to oil and gas demand as the Covid-19 pandemic has waned, geopolitical tensions have strained resource-rich countries, and prices have skyrocketed.

In this article, we’ll explore the factors that influence supply and demand, as well as the impacts of fluctuating demand.

What Causes Fluctuating Supply and Demand?

Shifts in supply and demand in the oil and gas market are influenced by a multitude of factors.

Economic growth plays a significant role on the demand side of things, as periods of robust economic expansion typically lead to increased energy consumption. Conversely, economic downturns caused by factors like natural disasters or disruptive events such as the Covid-19 pandemic – and their accompanying policy changes – can severely impact demand, as reduced economic activity and travel restrictions result in decreased energy needs.

Changes in consumer behavior, such as shifts toward energy-efficient practices or alternative fuels, can also influence demand patterns. Even simple shifts such as an unusually cold or warm winter can affect supply and demand.

On the supply side, geopolitical tensions, including conflicts in oil-producing regions or strained international relations, can disrupt supply chains and cause supply fluctuations.

Additionally, technological advancements, such as innovations in drilling techniques and extraction technologies, can impact supply by unlocking previously inaccessible reserves or improving extraction efficiency. Collectively, these factors contribute to the intricate and ever-changing nature of supply and demand in the oil and gas market.

How Changing Demand Impacts the Industry

Fluctuating demand has a profound impact on the oil and gas industry, influencing various aspects of its operations and overall dynamics. Here are some of the key areas affected by the ups and downs:

● Prices:Of course, fluctuating demand has a direct impact on oil and gas prices. When demand is high, prices tend to rise due to limited supply, and when demand is low, prices tend to fall due to oversupply.

● Production levels:When demand is high, producers may increase production to meet the demand and take advantage of higher prices. However, when demand is low, they may cut back on production to avoid oversupply and lower prices.

● Investment and exploration:Fluctuations in demand can also impact investment and exploration in the industry. When demand is high, there is more investment in new projects (like building new LNG terminals) and exploration for new sources of oil and gas. When demand is low, investment and exploration may slow down as companies attempt to cut costs.

● Industry employment:During periods of high demand, companies may need to hire more workers to increase production. However, when demand is low, they may have to lay off workers or reduce work hours to cut costs.

● Governmental policies:Changes in demand can influence oil and gas-related policies put in place by state and federal governments. During periods of high demand governments may be more willing to approve new drilling permits.

The Current and Future Outlook for Oil and Gas Demand

The U.S. Energy Information Agency (EIA) projects that global oil demand will rise by 2 mb/d to a record 101.9 mb/d in 2023 . Equally, natural gas consumption is expected to increase by 0.9 percent from 2020 to 2035 .

Where is this demand expected to come from?

Almost half the increase will come from China after the country lifts its Covid-related restrictions. And as nations like China and India experience record-breaking population booms, these countries will rack up a large appetite for low-cost fuels—like oil and natural gas. (India is expected to reach 1.429 billion people this year, surpassing China as the world’s most populous country.)

Additionally, demand for jet fuel will account for 57% of the 2023 gains, according to the EIA.

This hike in oil demand is unsurprising, despite the fact that many nations – particularly those in Europe – are attempting to shift toward renewable-forward policies. Legislation tends to outpace technological capabilities, as was demonstrated in Germany’s abrupt reversal of its pledge to deliver final approval of the European Union's legislation to ban the sale of new combustion-engine cars starting in 2035.

The scale and urgency of the global transition to renewable energy poses significant challenges. Rapidly increasing the share of renewable energy in the global energy mix requires continuous innovation and the development of new technologies and solutions.

The deployment of renewable energy technologies often involves overcoming technical, economic, and regulatory barriers. Scaling up technologies, improving efficiency, reducing costs, and addressing intermittency challenges are all priorities. Oil and gas demand will remain as countries around the world require reliable fuel sources in the interim.

Conclusion: Change Really Is The Only Constant

Fluctuating supply and demand is inherent to the oil and gas industry, driven by various factors such as economic growth, consumer behavior, geopolitical dynamics, and technological advancements. As oil and gas are tightly intertwined with our daily lives, the impacts of fluctuating demand.

About the Author

Alan Sullivan is a Senior Industry Consultant with Hexagon's Asset Lifecycle Intelligence division. With over 30 years as a software consultant specializing in plant-floor applications, Alan specializes in gathering requirements and working with large companies to design and implement software solutions to help their facilities address challenges and improve operations. In the last 20 years Alan has led projects and delivered successful solutions for clients in LNG, automotive manufacturing, nuclear power generation and other industries. Part of Hexagon’s pre-sales team focused on Operations and Maintenance, Alan works with owner operators to discuss their business processes, requirements and challenges – and how Hexagon solutions might help.

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