The Global Energy Perspective 2023 models the outlook for demand and supply of energy commodities across a 1.5°C pathway, aligned with the Paris Agreement, and four bottom-up energy transition scenarios. These energy transition scenarios examine outcomes ranging from warming of 1.6°C to 2.9°C by 2100 (scenario descriptions outlined below in sidebar “About the Global Energy Perspective 2023”). These wide-ranging scenarios sketch a range of outcomes based on varying underlying assumptions—for example, about the pace of technological progress and the level of policy enforcement. The scenarios are shaped by more than 400 drivers across sectors, technologies, policies, costs, and fuels, and serve as a fact base to inform decision makers on the challenges to be overcome to enable the energy transition.
About the Global Energy Perspective 2023
Growing global momentum could accelerate the energy transition, as demonstrated by the UAE Consensus, released in December 2023, that calls on Parties to make a just and orderly transition away from fossil fuels. Nevertheless, analysis from multiple sources, including the IEA, IPCC, and McKinsey, suggests that conventional fossil fuels are likely to remain a part of the energy mix to 2050, even in a 1.5° pathway, and may act as a bridge for an orderly transition. Therefore, decarbonizing the fossil fuel system and substantially reducing emissions, including methane, is a key area of focus. Within that evolving context, this article examines the potential outlook for global refining according to our sector-based adoption models.1To assess the different paths forward, McKinsey has established sector-based adoption models, in which it analyses model sector- and country-based adoption speeds of new technologies given a range of underlying insights and assumptions. These include existing and expected regulation, costs, asset lifetimes, supply chains, technological learning curves, and economic optimization as a system. To view our oil outlook, please visit Global Energy Perspective 2023: Oil outlook.
Although global oil demand is projected to decline across scenarios, its long-term trajectory remains uncertain
After an increase in global oil demand to pre-2020 levels, our four bottom-up energy transition scenarios suggest that demand would grow at a slower pace before beginning to decline by 2030, due largely to increases in energy efficiency and rapid growth in EV adoption.
The outlook then differs after 2030 across scenarios, depending largely on government policies regarding decarbonization and the availability and cost competitiveness of cleaner energy technologies.
In the Current Trajectory scenario, assuming continued technological progress in line with recent history across countries which have introduced and adopted net-zero legislation as of the end of 2022, global oil demand would fall by around 30 percent by 2050.
In faster transition scenarios, assuming countries which have announced net-zero commitments realize their targets in time, oil demand would shrink by almost half by 2050. To reach these net-zero targets, the share of EVs in passenger cars would reach around 90 percent of new car sales, the share of renewable fuels in aviation would make up 15 percent of jet fuel supply, and the share of plastics collected for recycling would double, all by 2035.
Several bottlenecks in, for example, availability of key materials, land, labor, and infrastructure may need to be overcome to enable to continued acceleration of the energy transition. For example, in the Fading Momentum scenario, demand could fall by only 3 percent over the same period. This scenario assumes supply chain bottlenecks for EVs delay the transition while governments reduce their net zero ambitions due to concerns for energy security, among other factors that could slow the energy transition.
Future oil demand could be impacted by the adoption of EVs
Road transport accounts for close to half of oil demand today, and, as such, is the main contributor to the decline in global oil demand modelled across scenarios. Over the last three years, EV sales have tripled, which has contributed to a reduction of 0.7 million barrels per day (MMb/d) in total oil demand in 2022.1“Electric Vehicles,” Energy System, International Energy Agency.
If the industry is able meet the production necessary to realize governments’ EV ambitions, as modelled in the Achieved Commitments scenario, global oil demand in road transport could fall by 1 MMb/d per year, on average, between 2030 and 2040. Even if governments and automakers slow their spending, as modelled in the Fading Momentum scenario, global oil demand in road transport would still decline slightly due to fuel efficiency improvements, at a rate of 300 thousand barrels per day (Kbd) per year between 2030 to 2040.2Includes sustainable fuels.
Recent data from 2022 and the first half of 2023 show EV sales in China and the European Union meet or exceed sales projected in the Achieved Commitments scenario. However, US sales have lagged behind, and track more closely to the Fading Momentum scenario. In 2023, EV sales in China and Europe reached 38 percent and 21 percent of total new car sales, respectively, compared to around 8 percent in the US.3“EV sales expected to hit new U.S. record in 2023—but Germany, China and Norway still lead the way,” Fortune, November 23, 2023. Rapid growth in Europe and China has been driven by subsidies, availability of EV models in line with consumer preferences, and relatively greater restrictions on internal combustion engine cars (such as vehicle access restrictions and license plate restrictions), which bring down the total cost of ownership for EVs in these markets.
In comparison, in the United States, car owners have been slower to switch to EVs given their greater preference for SUVs and the lack of affordable EV options on the market, the higher up-front costs of EVs in general, and concerns over the availability of charging infrastructure.4“EV sales expected to hit new U.S. record in 2023—but Germany, China and Norway still lead the way,” Fortune, November 23, 2023; McKinsey analysis. These factors could contribute to a delay in overall adoption, despite the availability of tax credits for new and used EVs under the Inflation Reduction Act.
After the last wave of mega-refining projects through 2028, rationalization is expected, primarily West of Suez
Growing environmental, social, and governance (ESG) progress and industry action in response to the energy transition are expected to limit future new investments in traditional refining capacity. The current wave of mega greenfield and brownfield projects seen in the US, Middle East, and China could be the last, as future projects may be more focused, including niche investments in petrochemical integration and/or biofuels conversions, in line with future demand.
Between 2023 to 2028, global refining capacity is expected to grow by 5.1 MMb/d, based on announced capacity, compared to between 0 and 4.6 MMb/d in demand growth in the same period in the Current Trajectory and Fading Momentum scenarios, respectively. This capacity increase includes 1.4 MMb/d of announced capacity rationalizations, which are primarily expected over the next two years, of which 90 percent are projected to occur in OECD markets where demand is projected to peak sooner.
This close balance between supply and demand could expose the refining market to greater risk of undersupply and sustained high margins in the near term.
Beyond the horizon of announced projects through 2028, between 2 and 15 MMb/d in refinery closures could be seen in the Fading Momentum and Current Trajectory scenarios, respectively, to rebalance the market in line with falling demand.
Most of the capacity that could see rationalization is located in the West of Suez markets,1Refers to regions west of the Suez Canal and includes North and South America, Africa, and Europe. primarily in Europe and parts of North America (the West and East Coast markets). These regions have a greater concentration of simpler, high-cost assets exposed to the shrinking demand market.
The East of Suez market is less affected and is even projected to grow in the Fading Momentum scenario to meet demand growth in Asia and the Middle East, while shrinking slightly in the other scenarios. While demand growth decelerates and peaks even in these markets in our forecast period, our assumptions consider national oil companies and petrochemical integrated refineries being at lower risk of closure.
The future profitability of global refining is linked to the global oil demand outlook
Global refining margins have dropped after reaching historic highs in 2022, and, as the energy transition progresses, there is opportunity for the industry to evolve and transform traditional business models. Robust margins are necessary to enable continued operation and viability, and especially to fund the technologies required to abate emissions from these operations.
According to our sector-based adoption models, from 2030 to 2040, future global average annual refining profitability, calculated on an EBITDA equivalent basis, could either remain roughly the same size compared to average 2015–19 levels or could shrink by approximately 35 to 55 percent, depending on the energy transition scenario modelled. The outlook will depend primarily on the global oil demand outlook and how much capacity is rationalized over time to rebalance the market. These factors in turn impact global refining throughput and global refining margins, which underpin the value pool evolution.
Margins in the United States are projected to remain in line with historical levels across scenarios through 2035
The US Gulf Coast refining complex is projected to maintain current margins across scenarios, allowing it to remain viable and operational, supported by the region’s access to relatively lower cost crude oil and natural gas, the relative high complexity of its assets, and close proximity to growing export markets in Latin America and Africa.
Compared to other regions in the US, even as local demand declines, US Gulf Coast refining throughput will likely remain at historic high levels to meet demand in the export markets. US Gulf Coast utilization and margins are projected only to start to decline after 2035, when some slowdown and reversal in demand trends in these export markets is projected.
In contrast, European refining margins are projected to fall in both the near term and long term, though Russian utilization will remain a key uncertainty. In the Asian hub, refining margins would fall in line with European margins in the near term, due to the growth in net new announced refining capacity in the Middle East and China, which could put pressure on regional utilization. In the long term, the demand decline is projected to be less pronounced in Asia, resulting in a smaller decline compared to that seen historically in Europe.
To request access to the data and analytics related to our Refining outlook, or to speak to our team, please contact us.
Cherry Ding is an associate partner in McKinsey’s Houston office; Brian Roth is a partner in the Minneapolis office; Micah Smith is a senior partner in the Dallas office; and Piotr Szabat is a solution manager in the Warsaw office.
The authors wish to thank Ricardo Baltazar, Enrico Furnari, Patrick Green, Eik Huan Kor, Szelee Kuek, Qian Liu, Alan Martin, Malwina Witczak, and Justin Yong for their contributions to this article.
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