Still Addicted to Oil

October 24, 2017

The global oil market will hit a major milestone in the third quarter of 2018 — the world will consume more than 100 million barrels of oil per day for the first time. The growth in oil consumption won’t stop there. The U.S. Energy Information Administration (EIA) sees total world oil demand rising steadily over the next few decades, reaching 122 million barrels per day (mbd) by 2050.

Long-term projections, of course, have a history of being notoriously off the mark. But it’s clear — based on current trends — we will be consuming a lot of oil in the coming years, contrary to experts who say that the oil era is in its twilight.

The problem persists—in fact, the entire world remains addicted to one fuel source for the entire transportation sector.

In the meantime, our oil dependence is not without consequences. Oil supply shocks from limited investments, instability in oil-producing countries, and rapid economic growth will underpin global oil prices for decades to come. The global geopolitical and economic outlook underscores the need for smart regulations and investments in technology to improve fuel efficiency and spur greater diversity in the transportation sector.

Ignore the peak demand hype

In contrast to all the recent talk about demand peaking in the coming decade, trends surrounding oil consumption, generally speaking, have shifted in the past few years as oil prices crashed and remained relatively low. We’re using a lot more than we thought we would. This year, oil demand will grow by anywhere from 1.4% to 1.6%. Low oil prices are a major driver of increased oil demand, alongside resilient economic growth.

The thirst for oil in emerging markets is incredibly durable, with not only China and India increasing their consumption as their populations aspire to a higher standard of living, but other Asian nations, along with countries in the Middle East and Africa, demanding more oil to grow their economies. Just as crucial, demand in the developed world is performing stronger than expected. From 2011-14, as the oil market traded above $100 per barrel, many forecasters believed that demand in the OECD had peaked as a result of increasing fuel efficiency, structural economic shifts after the Great Recession, and persistently high prices. But as prices tumbled, demand rebounded. For instance, from 2005 through 2012, oil demand in the U.S. (which consumes 20% of the world’s oil) fell by 2.3 million b/d (-11%), but has recovered by 1.3 million b/d (+7%) since then.

More EVs does not equal decreased oil demand

There are a couple of ironies about oil demand’s robust growth. One is that it is happening as daily headlines show that the world is in the midst of a transportation revolution. Some governments have touted their intentions to ban cars with the internal combustion engine (ICE) in the next couple of decades. Meanwhile, a long list of automakers has either rolled out or is planning to sell new models of electric vehicles (EVs). The other irony is that while petroleum consumption is rising at a brisk pace, the oil industry has cut back significantly on investments.

The current optimism surrounding EVs is encouraging. Consumers are becoming increasingly aware about their benefits and auto companies have included them at the center of their long-term strategic planning. This year’s sales numbers are encouraging. In the U.S., during the third quarter, EV sales grew by 16% year-on-year, and the number of models available to consumers has climbed to 38. Throughout the world, EV sales rose by 60% last year, with six countries seeing EVs capturing more than 1% of market share.

Despite the good news on the EV front, not all the numbers are rosy. Total sales still make up less than 1% of total vehicle purchases. The International Energy Agency (IEA) says EVs still have a long way to go before they will make “a significant dent” in oil demand.

While sales of EVs — or any alternative fuel vehicle — are vital in reducing petroleum dependence over time, the make-up of the existing fleet is also important.

Since the price crash of mid-2014, particularly in the U.S., consumers have increased their purchases of light trucks and SUVs that are less efficient, contributing to the uptick in demand. What this says is that the transition to a more efficient, less oil dependent vehicle fleet will be an extensive effort. As energy economist Peter Tartzakain noted: “You may be surprised to learn that more EV sales do not directly equate to less oil usage in transportation. Peak oil demand has more to do with how many ICE vehicles accumulate and remain in the global fleet, and less to do with how many new EVs are brought in.”

Rising oil demand is not only driven by gasoline-powered vehicles. Increased consumption in trucking due to economic growth is another factor, underpinning diesel demand. Freight deliveries by truck are expected to increase by 40% through 2040 in the U.S. alone. Aviation and shipping will also account for much of the growth in oil demand in the next decades since there are no viable fuel substitutes for petroleum in those sectors.

Oil industry slashes spending during downturn

The other irony that’s occurring during the current period of robust demand is that the oil industry has cut back sharply on capital expenditures. In 2015, upstream capital expenditures (capex) declined by 26%, and last year it fell by an additional 23%, in response to low prices and market uncertainty. Since 2014, the oil market has enjoyed an era of abundance, but with growing demand and OPEC leveraging rhetoric and mild cuts to increase prices, limited investment looms over the oil market, setting it up for a possible price spike in the next 3-5 years.

Not only does the industry have to grow production to keep up with the rise in demand; it also must offset declines in existing fields. Wood Mackenzie estimates that $1 trillion in investments could be sidelined from 2015 through 2020. On the supply side, rising production in the U.S. shale patch has been the highest-profile positive development in the past few years, but the long-term outlook is uncertain. Some analysts believe production could decline just as sharply as it ramped up, creating a supply gap in the global market.

Still addicted to oil

It’s been more than a decade since President George W. Bush said in his State of the Union speech: “America is addicted to oil, which is often imported from unstable parts of the world.” The problem persists—in fact, the entire world remains addicted to one fuel source for the entire transportation sector.

Given the uncertainty on the supply side, the coming storm in oil can be cushioned by demand-side initiatives—which is where the work of the advanced transportation industry comes in. Government policy is crucial in this regard.

There should be continued incentives to purchase natural gas, hydrogen, and electric vehicles along with programs to revamp infrastructure to support charging and refueling stations. Just as crucially, there needs to be robust consumer education on the benefits of EVs and other alternative fuel vehicles.

The transition to autonomy provides an opportunity for greater efficiency and diversity in the transportation sector, with vehicles being connected, autonomous, shared, and electric. While this future holds much promise in reducing petroleum dependence, the magnitude of the challenge means that there’s little time to waste.