introduction
The rapid rise of renewables; transition to gas as a cleaner fuel; and improved efficiency in energy conversion processes have all led to an increased traction, and significant “air time” in social media and the wider public eye for various doom-and-gloom outlooks for the oil industry. Perhaps generating the most interest currently (pardon the pun), is the rapid rise in the uptake of electric vehicles (“EV”); with some touting this as the most important game-changer for global oil demand and the single biggest reason why peak oil demand should be expected sooner rather than later.
There is no denying that EV technology has advanced more rapidly than most would have predicted a few years ago, and this is likely to continue. However, will it truly have the impact that some claim? Or is the popular rhetoric, as is so often the case, driven as much by the marketing power of tech companies and political agenda as it is by cold hard reality?
We look at the factors currently driving long term oil demand, distilling the current thinking of a number of key industry players, and put it into context with the likely impact of EV uptake across a range of scenarios. In addition, we provide a viewpoint on what flattening or reducing oil demand, as and when it occurs, would mean for the world’s significant oil producing countries.
factors driving long term oil demand
Examining the outlook out to around 2040, based on the views of a cross-section of key industry players, including E&P majors, industry institutions, leading universities and market experts, the following views appear to be consistently held:
By 2040, world population is expected to reach 9.1 billion, up from 7.3 billion today;
During the same period, global GDP will effectively double;
The majority of this increase comes from non-member countries of the Organisation of Economic Co-operation and Development ("OECD"), meaning rising living standards in essentially every corner of the world, and billions of people joining the global middle class where car ownership is a key indicator;
This expansion in the population, coupled with economic growth, is likely to drive total energy demand up by around 25%-30% by 2040, tempered somewhat by advancement of technologies which will improve efficiency in the way we use energy;
Mirroring the population forecast, energy demand growth is driven by non-OECD nations, rising by about 40 percent, led by Asia Pacific;
Renewable energy sources, notably wind and solar, are gaining traction at a faster rate than any fuel in history and currently form around 3% of the energy mix; and are forecast to rise to between 10% and 30% by 2035, however;
All forms of energy sources will be needed during this period to meet rising demand, with an obvious transition towards a lower level of carbon intensity in the energy mix.
Liquids made up 33% of total energy supply in 2015 (4,300 Million tonnes oil equivalent per annum). This is forecast to drop to 29% by 2035 but coupled with the overall energy demand increase, this equates to an absolute rise in liquids demand (5,022 Million tonnes oil equivalent per annum).
expected uptake of EVs – how rapid and what will be the impact?
In this article we specifically consider only the forecast for oil demand, which is broadly driven by two major components: transportation and petrochemicals.
Current global oil demand is around 96 Million barrels of oil per day;
Around 54% of this demand is driven by transportation (ships, trains, planes, trucking and cars/motorcycles), a percentage which looks set to remain fairly steady into the future;
37% of this transportation driven demand can be attributed to cars;
This equates to cars accounting for around 20% of current total oil demand.
How much of this car driven demand can we expect to be displaced by a transition to EVs; how rapid can we expect the uptake to be; and how does this play out versus the continuing trend of rising energy (and liquids) demand?
New registrations of EVs hit a new record in 2016, with over 750 thousand sales worldwide. However, to put this into context, total car registrations in the same period were 88 million, meaning EV accounted for approximately 0.85% of new car sales. In terms of the overall global car fleet, in 2016 EV stood at approximately 2 million vehicles on the road vs almost 1 billion in total, an operating market share of around 0.2%.
Recent forecasts of the penetration of EVs from variety of sources have gained much attention in the press and are wide ranging. Therefore, it is prudent to examine some of the industry energy outlooks and the assumptions that sit behind the headlines. The most common number that gets quoted is 100 million EVs by 2035, which would equate to just 5% of the global fleet, and result in a reduction of oil demand around 1.4 Mb/d, or up to 3 Mb/d if taken in addition to the rapidly improving efficiencies of Internal Combustion Engine (ICE) vehicles. On the other end of the scale, the IEA’s “carbon constrained 450 scenario” forecasts a rapid take up of EVs to 700 million or 37% of the global fleet, which may have a larger, although still relatively minor, reduction in oil demand of 6-8 Mb/d. Taking an even more extreme view, one could consider that within 20 years the rapid update in EVs could reach 50% of global fleet, especially when much of the growth of that global fleet will occur in the developing world. Yet, even in this extreme scenario, global oil demand would only be reduced by 10 -12 Mb/d.
The above scenarios are speculative, and it is worth remembering that the speed at which EVs are adopted will depend on many factors, including several currently limiting factors:
Large upfront battery costs and requirements for this cost to continue to decline at a rapid rate (currently $300-400 / kWh predicted to get down to below $150 in the 2020s);
Range of electric vehicles and availability of rapid charge infrastructure;
The cost of recharging, especially peak power (e.g. holidays) for quick recharging if consumers insist on maintaining long accustomed refuelling habits;
Increased weight of EVs, causing average power consumed to be higher than a comparable sized ICE vehicle;
Challenges associated with operating batteries and power electronics in both hot and cold environments (frost can destroy cells, batteries and other components can overheat), and;
Natural resource availability, particularly cobalt and lithium). Worldwide stocks of which are limited to a handful of countries and could prove a bottleneck.
what about other disrupting technologies?
While the focus of debate is EVs, the flaw in this analysis is it only considers what is already known, policy options, aspirations and technologies, and attempts to extrapolate this by examining how the current offering may improve; for example, battery cost and range in the case of EVs. Considering the quote attributed to Henry Ford: "if I had asked people what they wanted, they would have said faster horses", and acknowledging the rate of change of technology is accelerating; then it is important to attempt to examine the potential impact of new and hitherto unknown technologies:
fully autonomous passenger vehicles:
Efficiency gains due to more economical driving styles; efficiencies from "platooning", where vehicles interact with one another to travel in close convoy and reduce air resistance; congestion mitigation where vehicles are programmed to select the most efficient route; and improved safety performance, meaning vehicle weight can be reduced by the removal of crash protection measures give estimates that by 2050 the autonomous car may be 44% more efficient than current vehicles.
freight / road haulage:
By 2035 it is estimated 20% of total oil demand will be due to road haulage. With this share of the oil demand, advancement in road haulage technology presents a bigger threat to oil demand than passenger EVs. In a similar theme to EVs, there are three aspects of potential disruption:
Self-driving or autonomous trucks
Electric trucks
Autonomous electric trucks
It is estimated that by 2050 connected autonomous trucks could be 18% more efficient than current trucks. However, at present, technology companies are only targeting automating Highway driving, for context highways equate to only 5% of US roads. Although, Tesla announced an electric semi-truck in October 2017, with an expected range of 200-300 miles, which could be used for short-haul inner-city usage. However, until battery technology allows electric trucks to compete with ICE trucks in terms of long-haul range then the impact on oil demand of electrification will be relatively small.
Even imagining a scenario where a combination of autonomous trucks on highways and electric trucks for off highway driving is implemented, it can be estimated that it could equate to a 1-3% decrease in total oil demand by 2050.
aviation:
Wright electric has stated it aims for every short flight to be electric within 20 years and is seeking investors to help deliver a 150 passenger aircraft with a range of 300 miles. If we assume all flights less than 300 miles are electric by 2050 and make the broad assumption this is 20% of Global air travel, the electrification of air travel will still have less than 1% impact on Global oil demand by 2050.
A possibly bigger threat to oil demand than electrification is jet biofuel, with Air BP already supplying jet biofuel throughout Scandinavia and Boeing have committed to work with partners to develop jet biofuel. It is estimated that a sustainable, non-petrochemical jet fuel could have an impact of 3% reduction of oil demand, assuming 100% penetration of the technology.
shipping:
Marine is currently behind the land and air transportation industries, likely due to the massive distances covered in marine transportation exceeding feasible battery range. While the UN awarded a $1m UN Energy Grant to the SINTEF non-profit research institute, which aims to develop technology for a traditional ferry or other vessel with a plug-in hybrid electric powertrain, in December 2016; based on current technology and known projects, it is unlikely the impact of electrification of the marine industry will have a significant impact on oil demand.
hyperloop:
Hyperloop has the potential to introduce fast, hydrocarbon free transportation and there are suggestions that momentum is gaining in terms of the technology development. However, there is a huge amount of infrastructure to be developed and even an extremely optimistic outlook of 1% of journeys being made by hyperloop in 2050 would only yield an 0.5% impact on oil demand.
what might it all mean for global oil demand?
When examining the data, it appears more likely that a gradual move towards EVs will have a limited impact on the demand for oil through 2040. A more significant impact is the improving efficiency in use of the carbon fuel, but even coupled with this, the onset of EVs cannot completely offset the demand growth generated by the expected growth in GDP driven by the non-OECD countries.
The range of scenarios/views we have examined (TOTAL, BP, IEA, STATOIL, GNV-DL, EIA, OPEC) forecast oil demand moving from 96 Mb/d in 2016 to anywhere between 80 Mb/d, in the most carbon constrained view of the world, and 113Mb/d. This represents what could be considered a fairly narrow range of +/- 17%.
In bringing together some conclusions, including impact of some of the further potential disruptors, we have thought through five alternative outcomes for oil demand in the period to 2040 (and indeed beyond):
high-high:
An unpopular but possible scenario is a rise in to or above 120 Mb/d by 2035. This sees the uptake of EVs remaining niche, and increased efficiency of ICE coupled with a greater linkage to global GDP growth and energy demand, especially across the developing world.
known-high:
The outcome with the most consensus, where demand reaches 110 Mb/d. The GDP growth of energy demand is offset by efficiencies and significant but steady (5-10%) take up of EVs.
steady as she goes:
Oil demand grows marginally to around 100 Mb/d, rapid update in EVs (20%) but little other significant changes. GDP driven growth offset with efficiencies in how we use the energy.
known-low:
The more pessimistic of oil demand scenarios, requires rapid and deep penetration of EVs (50% or more); as well as efficiency gains across ICE and other transport sectors; and reduced GDP driven growth, resulting in a reduction in oil demand from today’s levels to around 80 Mb/d.
low-low:
Oil demand driven below 70Mb/d. This requires a significant, if not 100% of the global fleet to be EVs; as well as the start of reduction of other transportation demand due to electrification (shipping, trucks, planes); and contraction in the demand for petrochemical products.
The three central outcomes above represent the current range of industry forecasts but none of them really consider more extreme outcomes. It is difficult to imagine the Low-Low scenario given all the hurdles to EVs, and other alternative fuels for transportation, in the 20-30 year period. The low-low case would require an almost 100% conversion of the global fleet to EVs and in addition some fuel switching of other transportation forms. It is perhaps easier to imagine a world in which oil demand ends in the upper High-High scenario given GDP growth predictions and the assumptions made around embedding increasing efficiency into the energy system whilst rapidly growing the non-OECD population.
conclusion
Even with the most optimistic forecasts in growth of EVs (and other disruptors), the impact on world oil demand by 2040 feels bounded between a Low-Low case of 70 Mb/d (compared to 95 Mb/d, today) and a High-High case of 120 Mb/d.
EVs will certainly play an important role in the definition of the future energy mix and indeed as a trail-blazer / enabler for other technologies to evolve. However, the continued growth in global population and overall energy demand appears to suggest the threat to oil is minimal, and oil will continue to be a major fuel source for decades to come; albeit with a healthy and much-needed focus on improved efficiency in its use.
In the Low-Low scenario, impact on oil producing countries is almost certainly going to be limited to those whose unit technical development cost is relatively high: lower cost developers/producers such as the Middle East and OPEC member countries can be expected to grow in strength and gain a more dominant market share. The total remaining world oil demand, which is subject to a wide error margin, is estimated to be circa 2 Trillion bbls oil equivalent. Given this, it only makes sense that those oil resources with the lowest unit technical development cost will be produced first (and last); advantaged oil at least is here to stay.
Oil markets are cyclical and further oil price shocks will occur. However, the current expectation, for planning purposes, is the breakeven price for oil projects needs to be below c. $30//bbl and of course, the lower, the better; which means big oil is forecasting / betting on a long term price in the range $50/bbl - $60/bbl.
Key Data Sources
IEA: International Energy Agency, World Energy Outlook 2016.
EIA: US Energy Information Administration, International Energy Outlook 2016.
MIT: MIT Joint Program on the Science and Policy of Global Change, 2016 Food, Water, Energy and Climate Outlook.
IEEJ:Institute of Energy Economics Japan, Asia/World Energy Outlook 2016.
XOM: ExxonMobil, 2017 Outlook for Energy: A View to 2040, December 2016
BP: BP Statistical Review of World Energy, 2016
BP: BP Energy Outlook, 2017
Statoil: Energy Perspectives, 2017
Wood Mackenzie: The Future of Renewables, 2017 & Peak Oil Demand, 2017
OPEC: World Oil Outlook 2016