Transportation accounts for about 25 percent of all energy consumption in the world. According to ExxonMobil there will be 1.8 billion cars trucks, and SUVs in the world in 2040, up from one billion now. Increasingly, there is much discussion about the impact of electric vehicles on oil’s long-term outlook. It’s important to note that despite the hype and the fact that 2017 saw a cumulative 15 percent increase in electric vehicle sales over 2016, electric vehicles still account for only one percent of total global vehicle sales and these sales are concentrated in just a few countries.
Bank of America Merrill Lynch recently advised investors that by 2030, due to the introduction of electric vehicles, oil demand will peak. They predicted that by 2050, electric vehicles will completely replace conventional fuel burning vehicles. According to them, gasoline demand will peak by 2025 and total oil demand by 2030. Such scenarios would lead to the permanent decline in refinery utilization rates, with refining margins suffering heavily.
But all these predictions are highly unlikely and are leading to a crisis in capital expenditure in the oil industry. Since 2014 there has been a decline in investment in oil projects. No one is looking for oil because right now it seems to be everywhere. In 2017, oil discoveries were at the lowest in about seven decades. While that will not result in a major impact presently, if the trend continues, in about a decade the world will be facing a crisis. The oil being refined now was not discovered yesterday. It is the result of capital expenditures made years ago.
Electric vehicles will come into general use at a gradual pace. Manufacturing of electric vehicles is far from reliable:
* Support infrastructure from maintenance to charging facilities is yet to be available.
* Battery technology needs to improve and become less costly.
* More lithium and cobalt must be responsibly and reliably sourced.
* Battery recycling ought to be improved.
* Costs of operation for electric vehicles must come down.
* More power plants must be built to supply transportation demands.
All this will happen, but over many, many decades. Looking at the forecast annual average growth of electric cars and traditional cars with an extremely optimistic outlook towards the electric vehicles, the number of electric cars will only make up 25 percent of the total by 2050. This doesn’t equate to a ten percent reduction in oil demand for transportation.
In the meantime the uses for petroleum will continue. Petrochemical demand is increasing. Developing economies will need more plastics. Even the manufacture of electric cars relies heavily on petroleum-based plastics. The only way that there will be a reduction in the demand for oil is if there is a global economic collapse.
One way that such a collapse could happen is if the propaganda about the rise of electric vehicles continues to impact investment in the oil industry. Over the next decade the demand for oil will continue to grow. At current rates of investment, supply cannot keep pace. It is impossible to increase the rate that new oil is discovered. There is a limit on the speed that a known field can reach the point of extraction and distribution. It is a guarantee that the price of oil will increase.
Electric vehicle manufacturers cannot be faulted for their attempts to bring capital expenditures to their industry. But this emotional outreach is coming at a toll to the global economy. Since mid-2014 there has been almost one trillion US dollars in CAPEX cuts in the oil industry as a result of the low oil price environment. Global oil supplies will undergo huge supply challenges beyond 2020, with prices expected to reach or exceed $80/bbl by then.
In 1987, the share of fossil fuels in the global energy supply was 81 percent. In 2017, the share of fossil fuels in the global energy supply was still 81 percent. More global economic growth depends on more energy. Gas is already replacing coal and nuclear. Globally the world is using more oil than ever before. The electric vehicle industry is introducing doubts into investors’ minds about the viability of petroleum investments, when such vehicles won’t factor into reduced oil demand for many decades. In the meantime, the world needs oil and investment into the oil industry as a whole is urgently required.
Dr. Faisal Mrza
Energy and Oil Marketing Adviser (Former OPEC / Saudi Aramco)