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Wake Up Call for Oil Companies: Electric Vehicles will Deflate Oil Demand

Red Tesla Model S on Amsterdam canal (Photo David van der Mark 2014)

Red Tesla Model S on Amsterdam canal (Photo David van der Mark 2014)

The major oil companies greatly underestimate the impact electric vehicles will have on their market, write independent energy advisors Salman Ghouri and Andreas de Vries. According to Ghouri and De Vries, the trends currently underway in the auto industry are likely to have a substantial impact on oil demand in the medium term, and even a devastating impact in the longer term.

If there is one event in history that has shaped the crude oil industry, it is the popularization of the internal combustion engine (ICE) by the auto industry.

At the beginning of the 20th century, coal and wood were the dominant sources of energy, together providing more than 90% of global energy consumption. From 1910 onward, however, the Automotive Revolution triggered by Henry Ford spurred on demand for liquid fuels, causing crude oil’s contribution to global energy supply to more than double every decade. Consequently, by 1970 crude oil had taken top-spot in the global energy mix.

Continued growth in the transportation sector ever since has provided the world’s oil companies with plenty of organic growth opportunities. And judging by the energy outlooks the major oil companies have published, they appear to expect this status quo to continue. For example, BP’s most recent Energy Outlook 2035 assumes that non-oil based transport will grow just 5% per annum for the next 20 years, and that essentially all of this growth will be in the gas-powered transport segment. Similarly, The Outlook for Energy: A View to 2040 published by ExxonMobil assumes that by 2040 “plug in” electric vehicles (EVs) and fuel cell vehicles (FCVs) will have no more than a 4% market share. Chevron, meanwhile, has indicated that it plans on the basis of the assumption that the auto industry will remain fundamentally the same for at least another 50 years.

Alternative assumptions

However, as we documented elsewhere, the auto industry itself expects its future to be radically different from its present. To assess how the new vision of the auto industry would impact crude oil demand, we have developed an Alternative Energy Outlook (AEO).

The starting point of our AEO is research by Navigant Research, which predicts that by 2035 the total number of vehicles on the world’s roads will have grown to over 2 billion, from some 1.2 billion today. We assumed this growth to go through three distinct stages: during the period 2016 – 2020 a continuation of the 4% annual growth witnessed from 2010 to 2014, 2.5% annual growth during the period 2021 – 2030 as growth in China and India slows, and finally 1.5% annual growth for the outer period 2031 – 2040.

wake-up call figure 1

                         Figure 1: Vehicle pool growth assumptions of the AEO

We have looked at the implications of this growth of the transport sector for crude oil demand, under three sets of assumptions:

  • First, that the EV share in the global vehicle pool will increase based on a continuation of the current 50% annual growth rate in EV sales until the end of this decade, after which EV sales growth will slow down to 30% per annum during the period 2021 – 2030 and further slow down to 15% per annum during the period 2031 – 2040. This is the reference case in our alternative outlook.
  • Second, that the EV share in the global vehicle pool will increase based on a slightly lower 42% annual growth rate in EV sales until the end of this decade, after which it will slow down further to 25% per annum during the period 2021 – 2030 and 12% per annum during the period 2031 – 2040. This is the low case in our alternative outlook.
  • Third, that the EV share in the global vehicle pool will increase based on a 60% per annum growth in EV sales until the end of this decade, after which it will slow down to 36% per annum during the period 2021 – 2030 and further slow down to 18% per annum during the period 2031 – 2040. This is the high case in our alternative outlook.

The Alternative Energy Outlook

Using data from the IEA we estimate that in 2015 the global vehicle pool consumed 42% of the total crude consumption of 93.0 mmbd (million barrels per day), or roughly 39.5 mmbd. This data point enabled us to estimate what global crude oil demand would look like for 2020, 2030 and 2040, if the mentioned growth in vehicles will be entirely in the ICE segment of the transportation, as the conventional energy outlooks of the oil companies assume, and that average vehicle efficiency remains constant.

Our alternative energy outlook uses the same assumption for growth in the global vehicle pool, but assumes that EVs will displace some ICE vehicles. This enables us to assess the number of barrels lost from global crude oil demand due to EV penetration, through performing the following calculation for each of the mentioned periods (where CEO means “conventional energy outlook” and AEO means “alternative energy outlook”):

(Total number of ICE Vehicles CEO – Total number of ICE Vehicles AEO)* Average fuel consumption of ICE vehicle 2015 actual

wake up call figure 2

Figure 2: Vehicle pool compositions of the AEO

In the reference case of our alternative energy outlook, the number of EVs grows from its current 1 million to 8 million by 2020 (1% of the total vehicle pool), to 105 million by 2030 (6%), and to 424 million by 2040 (19%). The displacement of 7 million ICE vehicles by EVs during the period 2016 – 2015 would by 2020 result in a crude oil demand that is 0.3 mmbd lower than the forecast that is based on the assumptions of the conventional energy outlooks.

In the reference case a further 97 million ICE vehicles would be replaced by EVs during 2021 – 2030, and another 319 million during 2031 – 2040. This would remove 3.4 mmbd from the crude oil demand forecasted by the conventional energy outlooks by 2030, and 13.8 mmbd by 2040.

In the low case of the alternative energy outlook the number of EVs grows from its current 1 million to 6 million by 2020 (<1% of the total vehicle pool), 54 million by 2030 (3%), and 167 million by 2040 (8%). Here, crude oil demand would be lower than forecasted by the conventional energy outlooks by 0.2 mmbd by 2020, 1.7 mmbd by 2030 and 5.4 mmbd by 2040.

In the high case of the alternative energy outlook the number of EVs grows from its current 1 million to 10 million by 2020 (1% of the total vehicle pool), 227 million by 2030 (12%) and 1,188 million by 2040 (55%). The oil companies’ forecast for crude oil demand would then be reduced by 0.3 mmbd by 2020, 7.5 mmbd by 2030 and 38.9 mmbd by 2040.

wake up call figure 3

Figure 3: Crude oil demand losses according to the AEO

 Conclusions 

From an oil industry perspective, the positive news in our Alternative Energy Outlook is that EVs will have no meaningful impact on crude oil demand in the short term, irrespective of the assumptions used.

For the evaluation of the medium term impact of EVs it is important to remember that the recent crash of the oil price was caused by a supply – demand imbalance estimated to be around 2 mmbd. The low case of the AEO would already remove a similar quantity from crude oil demand, meaning that EVs should be expected to have a substantial impact on crude oil demand, and hence the crude oil price, in the medium term.

In the longer term the impact of the trends currently underway in the auto industry could well be devastating for the crude oil industry. The sooner the industry realizes this, the bigger the chances it will find new opportunities for growth in the future that the auto industry intends to create. 

Editor’s Note

Dr. Salman Ghouri is an oil and gas industry advisor with expertise in long-term forecasting, macroeconomic analysis and market assessments. 

Andreas de Vries is a strategy consultant in the oil and gas industry, supporting companies to not only develop strategies for success but also execute them.

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Discussions

Hops Gegangen's picture
Hops Gegangen on March 30, 2016

Per Yergin’s book, the original big market for oil was for kerosene lamps, which were made obsolete by electric lighting. Perhaps electricity will win again.

Nathan Wilson's picture
Nathan Wilson on March 30, 2016
Geoffrey Styles's picture
Geoffrey Styles on March 31, 2016

I agree that the potential for more rapid than expected vehicle electrification is something that the entire energy industry and its investors should watch closely. At the same time, we should be clear that a major factor in US EV sales, the $7,500 per car tax credit, will be less of a driver going forward than it has been so far, for two reasons.

First, as numerous articles concerning the launch of Tesla’s $35,000 “mass market” model have pointed out, the tax credit phases fairly quickly out once a manufacturer’s cumulative EV sales reach 200,000 units. In the previous decade we saw how the rapid growth of ordinary hybrids slowed once the less generous credits that applied to them phased out in this manner.

Another, less appreciated factor is the nature of the tax credit itself, and who qualifies to receive it. As a “non-refundable” tax credit, only someone paying $7,500 or more of federal income tax in the year of purchase is eligible to receive the full benefit. A few years ago I estimated that an individual taxpayer would need around $55,000 per year of “adjusted gross income”, which probably equates to $65-70,000 of total income, to meet this threshold. A married couple would need to earn even more, perhaps $80-90,000. That hasn’t been much of an obstacle for EV makers like Tesla as they targeted well-off early adopters with premium models like the S. It could become an impediment as the target market shifts toward mass adoption by the middle class.

John Miller's picture
John Miller on April 2, 2016

Hops, what most folks forget or did not know is that the original lamp oil was made from ‘whale oil’. Yes, in the past conversion to petroleum kerosene oil did effectively help save the whales. Another hydrocarbon also helped to displace a lot of kerosene lamp oil; natural gas/LPG. Even though electric lights have effectively replaced nearly all hydrocarbon fueled lamps, there are still a few limited applications today, such as camping lanterns.

Nathan Wilson's picture
Nathan Wilson on April 2, 2016

Tesla has announced that their Model 3 EV will be available in late 2017, with a starting price of $35k.

See Wired article.

Nathan Wilson's picture
Nathan Wilson on April 3, 2016

Yes, but the $7500 EV tax credit is not the only federal incentive that the electric vehicles receive. The CAFE rules impose fuel economy standards on each manufacturer’s vehicle fleet. So the more high-profit-margin gas guzzlers a company wants to sell, the more it need to find offsets (like EVs). So today’s low gasoline prices could create a beach-head for EVs that can later grow as battery technology improves and the cost of gasoline rises.

The next test of EV market-readiness may come late this year as Chevy starts producing its Bolt, which should beat the Tesla Model 3 to the market, with over 200 mile range and under $38k price (before tax credits).

Willem Post's picture
Willem Post on April 3, 2016

Nathan,

With over 400,000 pre-orders for the TESLA Model 3 in a few weeks (according to Musk, range at least 215 miles, price about $42,000, with options, less $7,500 tax credit for the first 200,000 units, $0 tax credit in excess of 200,000 units), it is clear EVs must have a range of at least 200 miles for mass appeal.

I hope other manufacturers finally will take note.

In January, GM introduced the 2017 Chevrolet Bolt, a battery electric hatchback with a range of 200 miles and a price of $37,500, less $7,500 federal tax credit.

GM would salivate to have 400,000 pre-orders for the Bolt, which likely will sell no more than 70,000 in a year.

Ethanol for mixing with gasoline will have reduced production in the future. That may mean the end of that wasteful, boondoggle program, which has a miserable ERoEI of about 1.3, only if counting by-products, about 1.1, if byproducts are not counted

http://www.theenergycollective.com/willem-post/287061/us-corn-ethanol-pr...

Mark Heslep's picture
Mark Heslep on April 7, 2016

“GM would salivate to have 250,000 pre-orders for the Bolt, which likely will sell no more than 70,000 in a year.”

The Bolt sales start this Spring, 2016, not the end of 2017, maybe, for the Model 3. Nor will Tesla reach maximum production before 2020 per Musk.

Mark Heslep's picture
Mark Heslep on April 7, 2016

“Yes, but the $7500 EV tax credit is not the only federal incentive that the electric vehicles receive…”

The total EV subsidy in California can be as much as $45,000.

Federal tax credit: $7500
CA State rebate: $2500
HOV vehicle lane resale premium: $3000
ZEV resaleable credits: $35000 (2013 per LA Times)

ZEV credits vary based on the CA CARB clean vehicle sales requirements, but will be 15% of CA’s several million per year vehicle sales in 2025.

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