Oil and gas demand is generally linked to economic growth. When times are good, companies expand and people spend, and everyone needs more energy. And when the economy slows down, demand drops. But if you’re considering investing in the oil and gas sector, you’ll need to do better than generalizations. So what are the biggest uses of oil and gas, and what are their respective outlooks?

When oil goes through the downstream process, it’s refined into different usable products – and the two most important are gasoline and diesel. Both of these are principally transport fuels (with diesel also used for heating); together, they represent over half of oil demand, making transportation the single most important factor in the demand equation. The second-largest use of oil, meanwhile, is as a “feedstock” for the petrochemical industry – with oil converted into plastic, rubber, and even food ingredients.

Natural gas is also used as a feedstock for the petrochemical industry. In fact, it can be used somewhat interchangeably with oil, and petrochemical companies often make a choice based on availability and economics (i.e. which is cheaper) along with other factors. But this represents only a fraction of natural gas demand.

The single largest use of natural gas is electricity generation, closely followed by heating in residential and commercial buildings. Together, that represents around two-thirds of global gas demand. Other uses exist in the industrial sector – where natural gas acts as a heat source in the manufacture of fabrics, glass, steel, and so on – and in the creation of agricultural fertilizers.

So what’s the outlook for all these demand drivers? With threats emerging on all fronts, it’s not the rosiest of pictures. For oil – where demand is heavily concentrated in transport fuels – electric vehicles (EVs) are increasingly displacing the need for gasoline and diesel. EV adoption is on the rise because the cost to buy and operate one is falling, and because governments around the globe are enforcing stricter air quality standards for road users. In fact, 17 countries have so far either imposed some kind of restriction on old-school internal combustion engine cars or set EV targets.

According to one study by a prominent research group, 57% of new car sales in 2040 will be electric – and over 30% of the global vehicle fleet will consist of EVs. That would mean a lot less oil demand: 14 million barrels per day, to be precise, over 10% of our current daily oil consumption. And this projection is one of the largest sources of fuel for the impending peak oil theory.

But hang on – if more people drive EVs, doesn’t that mean more electricity demand and therefore more natural gas? Well, yes and no. While electricity demand should grow, the impact on natural gas depends on where that electricity comes from. And in case you haven’t noticed, renewables are the fastest-growing source of energy right now – driven by falling costs and governments trying to tackle climate change.

Nevertheless, natural gas also has a transitional role to play here. Using natural gas to generate electricity is a lot cheaper and cleaner than burning oil or coal for the same purpose – and it also allows countries to install more renewable energy capacity, as it can quickly compensate for any dips in solar or wind power supply. That should stay true until the cost of renewable storage comes down far enough to see batteries the size of parking lots kick in when the wind isn’t blowing and the sun isn’t shining.

As for the other big components of natural gas demand – heating – that’ll most likely stay static as population growth is offset by increasing energy efficiency and electrification. The future of petrochemical demand (for both oil and gas), however, is less certain. Increasing opposition to single-use plastics and greater investment in plastic recycling may well see the need to use oil and gas in new plastic production reduced in the future.

Putting all of this together, what does it mean for oil and gas demand in the long run? Well, energy giant BP’s latest energy outlook forecasts demand for natural gas to grow at an average rate of 1.7% a year through 2040 – much higher than oil’s meager 0.3%. Both, however, pale in comparison to renewable energy’s projected annual average growth rate of 7.1%...

The takeaway: Oil demand is largely driven by transport fuels, facing an emerging threat from EVs. And gas demand is mainly driven by the power sector – fast transitioning towards renewables, albeit with natural gas an important transitional back-up for now.