After a devastating 2020, Rystad Energy projected demand for oil products in the US to grow by 1.08 million bpd in 2021 to 19.1 million bpd. This projection left politics aside but if President Joe Biden lives up to his promises after his inauguration, we see an upside to US products demand of about 350,000 bpd, as a result of the planned short-term economic stimulus and his infrastructure plan. The expected stimulus package includes financial aid to low-income American families, extended unemployment insurance payments, and billions of dollars in support to state and local governments to avoid layoffs of state employees. Together with a sizable infrastructure package and an increased likelihood of additional short-term stimulus packages down the road, the Democratic policies create a definite oil products demand upside. "These measures present a very bullish cocktail for US products demand in 2021. This infrastructure spending will certainly stimulate demand for oil in the short term because of increased construction activity, as well as in the medium term due to more efficient ports, bridges and roads that will enhance economic activity and passenger vehicle usage," said Chris Page, oil markets analyst at Rystad Energy. The final details of Biden's stimulus plan will be inked when the new President takes office, but they will certainly be subject to negotiations in Congress. However, assuming that Congress approves the short-term aid in February, we would expect to see an upside to US oil products demand of approximately 285,000 bpd for 2021. When it comes to the separate infrastructure spending in particular, we expect that the funds will be spread out over the course of 24 months, as was the case with the 2009 stimulus, and thus it will take some time for this spending to fully translate into increased oil demand. Accordingly, we estimate that the demand impact from these projects will be marginal in 2021, at approximately 60,000 bpd, before rising in 2022 to 330,000 bpd as much of the construction and impacts of the projects begin. Some of this infrastructure spending is expected to be directed towards creating "green jobs," or projects that seek to limit future carbon emissions. Nonetheless, Rystad Energy believes that Biden's team will need to tread carefully to avoid losing the senator votes whose states rely heavily on fossil fuel production. Therefore, we believe that any "green" focus of the infrastructure bill will be mostly additive to overall short-term oil products demand due to construction activity, with risks mostly limited to medium-term oil demand, depending on the scope and success of the projects. The long-term effect If the Democrat plans bear fruit, we expect that demand could rise by an additional 350,000 bpd for 2021 and 900,000 bpd (including a China tariff cancellation impact* of 300,000 bpd) for 2022 relative to the status quo. However, as environmental regulations, particularly for fuel economy, start to take more effect, we believe that Biden's presidency will ultimately cause demand to drop, particularly as we head towards the latter part of the 2020s. China* upside potential Nevertheless, with different countries and industries jockeying for relief from tariffs, and with Biden saying that trade talks will take a "backseat" to a domestic recovery, we believe that changes to tariffs and overall US policies in relation to China will proceed somewhat slowly. These tariffs serve as a key bargaining chip with China, and we believe it is unlikely that Biden will simply give them up easily without concessions from the Middle Kingdom. Therefore, while we anticipate that Biden will ultimately veer towards canceling the tariffs, we believe that the impact will likely be delayed to as late as 2022. A full cancellation of tariffs between the US and China would increase maritime oil demand by approximately 300,000 bpd. Fuel economy and electric vehicle regulations Biden's election brings an end to Trump's plan to decelerate proposed fuel economy increases from 2022 through 2026, from Obama's standard of 4.7% per year to only 1.5% per year. However, there are reasons to doubt that Biden will immediately revert back to the Obama-era standards. To start with, the US auto industry has been hit hard by the pandemic: sales fell by approximately 15% year-on-year to between 14.4 million and 14.6 million vehicle sales in 2020. Automakers may lack the R&D and marketing funds to achieve the Obama-era standards by as soon as 2022. Also, amid cheaper prices for gasoline, Americans appear to be gravitating towards light duty trucks, with such vehicles comprising 56% of vehicle sales in 2019, leading to a y/y decline in fuel economy. This lack of interest in sedans and other more fuel-efficient vehicles may make compliance with aggressive fuel economy standards (which involves purchasing credits from electric vehicle manufacturers like Tesla) much more costly for manufacturers. Therefore, we expect that Biden will adopt the deal that California struck with several major automakers to increase fleet-wide efficiency to 51 mpg (versus 54.5 mpg under Obama and 40.4 mpg under Trump). Given that several major auto manufacturers have already agreed to (and theoretically likely have begun preparing for) these rules, we believe this could be an easy way for Biden to strike a compromise early on, while still achieving significant efficiency gains. A full return to Obama-era standards would lead to approximately 500,000 bpd in lower oil demand by 2025 compared to a second Trump term. Under the California deal, we expect that the impact on oil demand would fall to approximately 370,000 bpd. Since several auto manufacturers had already agreed to this standard before the election, we have not revised our demand forecast downward due to these likely regulations. For 2025, at the moment we expect that the US will consume approximately 20.0 million bpd of oil products. — Rystad Energy
