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.
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.
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
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.
Figure 3: Crude oil demand losses according to the AEO
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.
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.