The economic slowdown caused by COVID-19 and the subsequent global lockdowns, including limited mobility, led to a historic collapse in oil demand in 2020. Demand for transportation fuels was most heavily impacted by this unprecedented situation. According to various oil market sources, transportation fuel represents almost 52 percent of total demand for oil fuels.

However, as economies opened and people returned to conventional ways of life, oil demand recovered swiftly; much faster than most analysts had predicted. This recovery was primarily driven by proactive management of the pandemic, high levels of household savings during the pandemic, coupled with a steady rebound in economic activities buoyed by massive stimulus programs by countries that are major consumers of oil.

For example, the US Commerce Department reported a 6.9 percent increase in gross domestic product in the last three months of 2021, leading to annualized growth of 5.7 percent in 2021, the highest growth rate achieved since 1984. This followed a decrease of 3.4 percent in 2020, which was the largest drop in more than 70 years.

In fact, oil demand has been recovering faster than anticipated and should easily reach and exceed pre-pandemic levels in 2022. OPEC’s latest monthly oil market report indicates that oil demand will reach and exceed pre-pandemic levels this year. Demand is expected to hit 100.2 million barrels per day on an annualized basis, compared to 100.1 million bpd in 2019. The two main energy agencies, IEA and EIA, have echoed the same sentiment regarding oil demand in 2022.

There are, however, some challenges that may soften demand recovery in the short to medium term. For instance, the increasing number of COVID-19 cases around the world due to the emergence of the omicron variant, the inflationary pressure which in turn leads to high retail prices and the international push to adapt alternative fuels to reduce carbon emissions are all factors that need to be closely monitored for their potential impacts on oil demand.

Keeping this in consideration, oil prices have reacted quickly to these positive developments, but the lack of meaningful investment in the oil and gas sectors is also expected to reach unprecedented levels in the coming years.

In fact, low investments in oil and gas sector over the past years, as part of the energy transition process, will hinder the expectation of additional oil production to be driven to the market over the medium to long term. If demand continues to increase, we should expect a highly volatile market going forward.

Managing the energy transition process will amplify the importance of the roles of OPEC and OPEC+ in balancing the oil markets, particularly over the next few years. Over the longer term, it will inevitably be more difficult to paint a clearer picture, as most industry analysts are assuming flattening oil demand from 2030 onward — primarily driven by the increasing popularity of electric or hybrid vehicles — and further declining investment appetite in the oil and gas sector.

However, the what-if scenarios facing the oil market will need to be taken into consideration carefully while planning for future oil market developments. What if the adaptation of electric or hybrid vehicles falls short of expectations because of expensive electric vehicles, or lack of proper infrastructure to address the anticipated growth, or raw material shortages, or delays in supporting technology, or consumer hesitance to adopt a new technology?

It should also be mentioned here that the future energy demand would be driven mainly by developing countries, which face energy shortages and lack appropriate electric infrastructure setups.

The implications of erroneously projecting oil market fundamentals are enormous. For instance, it could handicap economic development via unaffordable energy prices and make inflation even more difficult to manage, thereby negatively impacting economies across the world.

A realistic, balanced and closely monitored energy transition process should provide much-needed comfort to the industry. The latter is currently a role of OPEC and OPEC+, while the former is dependent on everyone in the oil and gas industry.

• Hassan M. Balfakeih is an oil demand specialist and former chief oil demand analyst at OPEC Secretariat.