The Electric Transition

A wide array of projections are starting to show how electric vehicles (EVs) may start to impact global oil demand. The transition away from conventional internal combustion engine vehicles (ICVs) to EVs has  started to become a cause for concern for some major oil companies and fossil fuel interest groups. Moreover, the rise of EVs has started to initiate a new wave of discussions about peak oil, but not in the traditional sense as it relates to the 1956 Hubbert peak oil theory. Instead, rather than the world running out of oil as a result of increasing demand, energy experts and economists have hypothesized that EV adoption could influence peak oil demand. A declining number of gas-powered vehicles could eventually push the world away from peak oil consumption and towards a continued decline in oil demand. A critical element that will impact estimates related to EV adoption and peak oil demand is whether automotive companies will invest in future fuel-saving technologies for ICVs or instead, accelerate the development and production of EVs (Sioshansi & Webb, 2019).

Global demand for EVs is predicted to rise sharply in the coming decades. Even though EVs only accounted for about one percent of global annual automotive sales in 2016 and just 0.2 percent of vehicles on the road, new projections by the global management and consulting firm, McKinsey & Company, show that by 2030, EVs (including battery electric vehicles and plug-in hybrids) could rise to nearly 20 percent of annual global vehicle sales (and roughly 35 percent of sales in Europe) (Hensley et al, 2018). On the other hand, Morgan Stanley analysts say that because global vehicle miles traveled (VMT) is expected to rise to 32 trillion by 2030, a rise from 11 trillion currently, increases in electric cars and light trucks will also be met by gains in gasoline-fueled vehicles (Domm, 2018).

Changing Consumer Preferences

Recent consumer preference surveys suggest that 30 percent of individuals interested in buying a car and nearly 50 percent of millennials would consider purchasing an EV rather than an ICV for their next vehicle (Hensley et al, 2018). According to the survey, a desire to help save the environment and reduce greenhouse gas emissions were primary reasons for consumers to choose an EV over an ICV.

An additional study conducted by AAA revealed that 87 percent of respondents would purchase an EV as a result of environmental concerns. Moreover, as the up-front price of EV-related technology continues to drop, consumers may start to become more willing to make the switch from ICVs. While the current price of EVs has been highlighted as a barrier to adoption, a number of studies have shown that the lifecycle cost of an EV is equal to or already lower than ICVs (Sioshansi & Webb, 2019).

Another influencing factor that has favored EVs over ICVs is the car-sharing industry. An array of car sharing startups, including established organizations like Uber and Lyft, have been focused on the advent of transportation as a shared service. Within many car-sharing models, companies are planning to expand services with EVs rather than ICVs to meet environmental goals, reduce lifetime automotive costs, and address consumer preferences.

Traditional automakers are also implementing electric car-sharing initiatives. Volkswagen (VW) recently launched an all-electric car-sharing service in Berlin, Germany that added 1,500 Golf compact EVs to the City’s streets. By 2020, the program is expected to add an additional 500 EVs in Berlin and will expand to Hamburg and Prague. Investments in EV car-sharing programs have been aimed at limiting roadway congestion, reducing the rate of vehicle ownership, and cutting back on air pollution.

Peak Oil Theory vs Peak Oil Demand

The increasing rate of EV adoption, coupled with consumer preferences for environmentally responsible products and services, and investments in EV-based car-sharing programs justify projections that an increase in the EV market share could consequently have an impact on peak oil demand. While scientists and energy industry analysts have moved away from the 1956 Hubbert peak oil theory, experts have been placing a greater emphasis on studying peak oil demand. The movement away from the peak oil theory has largely come as a result of continued discoveries of new oil-related reserves and the increasing investments that fossil fuel companies have been making in extraction technologies. New fossil fuel discoveries and advancing technology have consistently outstripped most projections that previously stated how the world was on the verge of running out of oil. Instead, new research related to EV adoption is predicting that the demand for oil will peak and decline within the next two decades because of this shift in the transportation sector (Sioshansi & Webb, 2019).

Global Vehicle Growth

The ongoing growth in the global automobile population is projected to increase from one billion vehicles in 2016 to over two billion vehicles by 2040 (Sioshansi & Webb, 2019). Rapid population growth and rising incomes in developing countries like China and India are projected to fuel the increasing supply of EVs on the road. Moreover, China has been the world’s largest and fastest adopter of EVs. However, even with aggressive penetration of EVs from developing countries like India and China, Morgan Stanley analysts still forecast the global demand for gasoline to triple by the mid-2030s prior to beginning a slow decline (Domm, 2018).

However, while demand for gasoline is still projected to rise through the 2030s, major oil companies are starting to acknowledge that peak oil demand may be approaching more rapidly than originally anticipated (Sioshansi & Webb, 2019). In late July 2017, the CEO of Royal Dutch Shell, Ben van Beurden, said that oil prices may have moved into a “low forever” scenario, which means that he believes oil prices will not recover to their previous peak price of $100 per barrel, and are likely to remain stagnant at around $50 per barrel for the foreseeable future (Sioshansi & Webb, 2019). The oil supply glut of 2018 and 2019 may just be a hint of what’s to come as EVs start to replace traditional gas-powered vehicles around the world.

While the growth of EVs and hybrid vehicles is only expected to reduce oil demand modestly over the next decade, downward pressure on oil markets has already started to come as a result of efficiency improvements being made to traditional gas-powered vehicles. Increasing aerodynamic efficiency and reducing the overall weight of vehicles has helped to raise the average miles per gallon for a gas-powered vehicle in the U.S. from 26 in 2005 to 32 today (Hensley et al, 2008). Furthermore, vehicle efficiencies have been increasing by about two percent annually since 2005 and are expected to continue to rise by about 2.5 percent annually through 2025 (Hensley et al, 2008).

Estimating Peak Oil Demand

When comparing how global oil companies have responded to increasing vehicle efficiencies and the rising rate of EVs being adopted, industry leaders have started to predict a potential date for peak oil demand. While Royal Dutch Shell has acknowledged that the energy market may have already experienced a peak in oil prices, their analysts expect peak demand to occur in the early 2030s, whereas BP analysts think peak demand could occur in late 2030/early 2040 (Sioshansi & Webb, 2019).

On the other hand, when Exxon Mobil was asked about peak oil demand, their analysts stated that they expect oil demand to soar 40% above current levels by 2040 (Sioshansi & Webb, 2019). In their 2019 annual report, BP stated that it is preparing its operations for a future with oil demand increasing “much slower than in the past” (Egan, 2019). Moreover, the company also expects that the total number of EVs on the road will surge to nearly 350 million by 2040, or about 15 percent of all vehicles (Egan, 2019).

The International Energy Agency does not see oil demand flattening until 2024, even with a rise in EV purchases (Egan, 2019). In 2018, EVs, hybrids, and fuel efficiency upgrades in light-duty vehicles only displaced around 50,000 barrels of oil a day, in a world that currently consumes in excess of 100 million barrels of oil per day (Domm, 2018). However, China has been pushing EV sales at unprecedented levels in an effort to reduce the country’s toxic air pollution. Even though total passenger vehicle purchases dropped by four percent in China during the 2018 calendar year, EV purchases skyrocketed by over 61 percent, to just over 1.3 million vehicles (Egan, 2019). Moreover, by mid-2020 the International Energy Agency says that China may achieve its nationwide goal of deploying five million EVs (Egan, 2019). By 2024, as a result of increasing EV sales within the country, China alone is expected to offset nearly 160,000 barrels of oil per day.

Global EV Penetration

While a general consensus of economists agrees that the global demand for automobiles will increase from the current 1.2 billion to over 2 billion by 2040, there is less of a consensus about the expected level of EV penetration by 2040 (Sioshansi & Webb, 2019). Some studies have projected very slow EV growth rates, while others have already shown that EVs have exceeded a growth rate of 50 percent in some markets.

Not surprisingly, oil company estimates of future EV adoption have been much more conservative than projections released by organizations that are not tied to the fossil fuel industry. For example, while the UBS investment bank recently released a report that estimates EV how sales will make up 14 percent of global vehicles sales by 2025, BP released a similar report that only expects the EV population to grow to 16 percent by 2040 (Sioshansi & Webb, 2019). Similarly, the Organization of the Petroleum Exporting Countries (OPEC) expects that EVs will only make up 12 percent of all vehicles by 2040 (Sioshansi & Webb, 2019). On the other end of the spectrum, Blomberg New Energy Finance released a report in 2017 that highlights how EV sales will account for over 50 percent of vehicle sales by 2040, which is vastly higher than any oil company expects (Sioshansi & Webb, 2019).

The prospect of EVs reducing the global demand for oil has led to some proactive financial moves around the world. Despite the news from the International Energy Agency that EV sales wouldn’t have an impact on fossil fuel companies for at least a decade into the future, Norway has already started to dump its oil stocks. This past year, Norway’s government revealed public plans to have its $1 trillion sovereign wealth fund incrementally phase out all investments in oil exploration and production companies (Egan, 2019). This was a significant announcement given that Norway is Western Europe’s largest oil producer.

War Against the EVs

The uncertainty of how EV sales will impact oil demand has prompted fossil fuel interest groups like the Koch empire and Exxon Mobil to start to wage a war against the electric car movement. These organizations have launched a nationwide, multimillion-dollar battle in an effort to hinder utility company plans from building EV charging stations around the country (Bade, 2019). Oil-backed organizations have started to take notice of an increasing number of reports that are saying how EVs will eventually hurt their profits. Bank of America Merrill Lynch released a report in 2018 that revealed how oil demand would start to drop quickly in the 2021-23 period as the impact of EVs start to become widespread (Domm, 2018). The uncertainty around the outlook for gas-powered vehicles and peak oil demand are expected to continue to cause anxiety for oil companies and fossil fuel investors in the near future.

Sources

Bade, G. (2019). “The oil industry vs. the electric car.” Politico.

Domm, P. (2018). “Electric vehicles: The little industry that could take a bite out of oil demand.” CNBC.

Egan, M. (2019). “’No peak’ in oil demand yet, despite electric cars, IEA says.” CNN.

Hensley, et al. (2018). “Three Surprising Resource Implications from the Rise of Electric Vehicles.” McKinsey Quarterly: 00475394, 2018, Issue 2

Sioshansi, F., & Webb, J. (2019). “Transitioning from conventional to electric vehicles: The effect of cost and environmental drivers on peak oil demand.” Economic Analysis and Policy.