For decades, the global economy had a nearly insatiable appetite for crude oil. That caused consumption to steadily march higher, peaking at more than 100 million barrels per day (BPD) in the past year. Meanwhile, even with renewable energy starting to steal market share, most industry prognosticators expected this upward trend to continue for the next couple of decades.

That was until COVID-19 knocked the wind out of the oil sector by causing demand to fall off a cliff. When combined with the stunning decline in renewable energy costs, this unexpected demand shock is now causing a major shift in the long-term oil market outlook by oil giant BP (BP -0.38%). Instead of forecasting continued consumption growth, the oil company now believes that demand has peaked and will decline even in a best-case scenario. It's a chilling forecast that has reframed how BP plans to operate in the future.

An offshore oil rig platform with the sun rising on a frozen sea.

Image source: Getty Images.

Peak oil of a different kind

As it does every year, BP has updated its energy outlook, with its latest one stretching out to 2050. The report contemplates three main scenarios for the decarbonization of the global economy: Rapid, net-zero, and business as usual. While each scenario envisions that transition happening at varying speeds, all expect renewable energy to gobble up market share from fossil fuels over the next 30 years. That's why BP estimates that oil demand has probably reached its peak after rising steadily for decades.  

For example, in the business-as-usual scenario, which is most favorable to the fossil fuel industry, BP foresees oil consumption nudging slightly higher over the next decade or so before steadily declining to around 90 million BPD by 2050. While it does expect some demand growth from the aviation, marine, and rail sectors, it believes that consumption from passenger cars, trucks, and buses will decline. That's a much more tepid outlook than the industry had envisioned not that long ago, with many forecasters fully expecting continued demand growth for the next couple of decades before plateauing.

Meanwhile, the other two scenarios paint an even bleaker picture for the oil patch. Under a rapid shift to renewables, oil demand has already peaked and will briskly decline over the next three decades, falling by about 50% by 2050. Similarly, the net-zero scenario has oil demand already reaching its peak, with an even faster plunge anticipated as it sees consumption plummeting toward a mere 20 million BPD in 30 years.

Aligning its strategy to its outlook

BP is taking its energy outlook seriously as it's completely revamping its approach to better align it with its forecast. At the heart of its new plan is a shift in where it allocates capital, with the company pivoting its investment dollars toward low-carbon energy sources. Overall, the company expects to ramp these investments up from $500 million per year to $5 billion annually by 2030. Meanwhile, it plans to trim its spending on fossil fuel development. As a result of this shift, BP expects to produce 40% less oil equivalent output per day from last year's average by 2030 while growing its renewable energy generation by twentyfold. 

BP plans to rapidly scale its renewable energy business over the next five years. It had 2.5 gigawatts (GW) of operating capacity at the end of last year. However, it aims to build 20 GW by 2025 as it tracks toward 50 GW by 2050. It recently made a major step toward achieving that goal by partnering with fellow oil giant Equinor (EQNR -0.07%) on two U.S. offshore wind projects. BP will invest $1.1 billion for a 50% stake in these two projects, which will have the capacity to produce a combined 4.4 GW of electricity (enough to power more than 2 million homes) when they start-up in the 2024-2025 timeframe. 

In addition to that big splash in offshore wind, BP also plans to invest lots of capital into solar, which will likely make up the bulk of its investments over the next few years. That's due to the combination of rapidly falling costs and a quick development timeframe of 18-24 months from concept to construction. The company already has quite a few projects in development, including a 260 MW solar farm in Texas that will supply its operations in the state.

The end of oil's dominance seems near

Even in a best-case scenario for the oil industry where the global economy continues with a business-as-usual approach, BP believes that oil demand has basically reached its peak and will decline by 2050. Meanwhile, other scenarios contemplated by its energy outlook paint an even bleaker picture for oil consumption. Accordingly, the energy company plans to pivot away from investing in new oil projects and instead plow money into lower-carbon sources like renewables. That shift bears watching as it could spur others in the sector to follow its approach so that they don't end up becoming extinct.