By Kennedy Maize
Global demand for oil will peak in about the next four years and then start declining, leaving 20% of the world’s oil refineries starved and facing closure, according to a new study from the energy consulting firm Wood Mackenzie. 
“For the refining industry,” Woodmac advises, “hope is not a strategy.” Analyst Alan Gelder says, “For the first time, the industry faces sustained decline in end-market demand rather than a temporary supply disruption. Scale, complexity and location determine which assets have genuine options. For those without structural advantages, the absence of a credible adaptation plan is not a deferral. It is a decision.”
The leading edge of the coming decline for barrels will be the rise of volts, cratering the demand for gasoline, according to the report. Electric vehicles will punish petrol, while diesel, gasoil, and jet fuel “are more resilient, as heavy road transport and aviation have no clear decarbonisation pathway.”
Geopolitics will also play a role, says Woodmac, when current Middle East conflicts cool down. Elevated refinery margins are driven by the regional unrest. The analysis notes that “refining margins are determined by crack spreads, not the oil price, and long-run average benchmark margins are slim.”
“Peak oil” prognostication has a 70-year history, although the mechanisms postulated as driving it have changed. In 1956, noted geologist M. King Hubbert (1903-1989) presented a paper to the American Petroleum Institute where he predicted that world oil production would peak somewhere between 1965 and 1970. A 2023 discussion of the Hubbert theory from the American Association of Petroleum Geologists said, “When petroleum production peaked in 1970 and subsequently declined for 38 yr, Hubbert’s model was corroborated, and he was heralded as a prophet and an oracle.”
The AAPG article then observed, “However, Hubbert’s peak oil theory was effectively falsified when United States oil production began to increase in 2009 and surpassed the 1970 peak in 2018…. A false belief in the future scarcity of oil driven by peak oil theory resulted in the misallocation of resources. Bad science produces bad public policy.”
Woodmac’s take on peak oil focuses on demand, not Hubbert’s warnings on supply.
Noting that the demand curve “is not uniform,” Gelder describes five “archetypes” of refineries, featuring “sharply uneven exposure.” The first two are “best placed to become the integrated energy parks that define the sector’s future.”
- Large-scale, high-complexity refineries, such as major assets on the US Gulf Coast, modern export-oriented facilities in the Middle East and the Dangote refinery in Nigeria. These are “the most competitive.”
- Complex chemical-integrated sites, “increasingly common in China and parts of Europe and Asia, “which can redirect output from declining transport fuels into petrochemicals.”
- Coastal cracking refineries, most common among the members of the Organization for Economic Co-operation and Development, mostly the developed world. These nations face “direct international competition and narrower options.”
- European assets, which “face the most acute regional pressure. Small-scale specialty assets, focused on lubricants, bitumen and waxes, carry limited exposure to transport fuel decline.”
- Small-scale, low-complexity refineries, many of them national oil company-owned in developing countries, “survive only through subsidies.”
Wood Mackenzie identifies several strategies to cope with the coming market changes, adding that “high capital costs and market uncertainty make many difficult to execute.” Chris Barry, Wood Mackenzie vice president, says, “The capital required for the most of these adaptation strategies is substantial, and the sector’s return profile makes raising it harder than it appears from the outside.”
The problem, says Barry “is a mismatch between ambition and balance sheet capacity. Petrochemical and renewable fuels integration may be an attractive growth or diversification opportunity for large, complex, well-positioned assets. For structurally weaker sites, consolidating around local market strength or moving into specialty products is the more defensible route to long-term viability.”
The future for refined oil products, says Wood Mackenzie, is “bifurcated.” Refined products “remain central to the global economy for several more decades, and well-positioned refineries have a viable future.”
“World-class integrated energy and molecule parks producing fuels, petrochemicals and specialty products at one end; terminal conversion, repurposing or closure at the other,” according to the analysis. “Sector specialists will survive by monetising local advantages in feedstock access, regulatory environment or state support.”
For investors and owners, “The question is not whether a refinery will face pressure, but whether its archetype, location and ownership structure give it the tools to adapt.”
The Quad Report, covering energy policy and politics
