01 Dec 2017
Oil consumption is currently 95 million barrels per day (mb/d), an increase of 11% since 2008, despite the anaemic economic recovery following the financial crisis.
However the widely held view is that demand is peaking and will start to fall imminently.
A large part of this thesis is based on the increasing availability of electric vehicles (EVs). The basic argument is that increasing EV adoption will lead to demand for gasoline/oil/diesel products (‘oil’) inevitably falling sharply, leading to a collapse in the oil price. However, we do not believe this to be the case and the claim is undermined by the data. We accept that the future of the car is evolving rapidly, that the proportion of EVs will grow substantially over the coming years, but it appears to us that the likely speed of adoption is overstated. Furthermore, even if the take up of EVs was to rise more quickly than we believe, the impact on total oil demand is likely to be limited.
We believe many investors under-appreciate the dynamics of global oil demand. Out of the 95mb/d of global demand for oil, only 19mb/d, or c.20%, is actually for passenger cars (see Figure 1). We have assumed that heavy duty trucks and other transports (e.g. ships and planes) cannot be electrified given the power to weight requirements.
Figure 1: Oil demand from cars in a global context
Source: BP, as at 31 December 2016.
The other key element is a stock versus flow argument when it comes to the future of the car fleet. The global car fleet consists of around 1bn cars and virtually none of these are electric. Every year, around 100mn new cars are sold and 30mn are scrapped leading to an increase of around 70mn cars per year in the global fleet. Unless all cars sold move to be electric vehicles very quickly indeed, the fleet of ICE cars (internal combustion engine) will continue to grow, (at least in the medium term) even if adoption of EVs increases rapidly.
The world of vehicles is changing, yet how the consumer responds remains uncertain. The shift towards electric has been supported by significant government incentives. Norway, for example, owes its success to the hundreds of millions of dollars in tax revenues diverted towards subsidies making it almost free to drive an electric car. Today it is normal for a Norwegian to buy an electric car in addition to a petrol vehicle for daily use to save money. Yet in countries such as Denmark and Hong Kong, where subsidies have been removed, sales of EVs have dropped dramatically. When the incentive was dropped in Denmark in January 2016, EV sales plunged 80% from the previous year (source: FT, as at 21 March 2017).
As we stand today, the battery supply chain is a critical but little discussed constraint to rapid EV adoption. Modern battery technology requires a number of rare materials, for example lithium and cobalt, which are essential ingredients. We do not yet see a robust-enough supply chain for these products for the scale that would be required.
Different parts of the world are at different stages of developing the necessary infrastructure for the adoption of EVs. However the questions raised are broadly consistent: where can I charge my battery? How long will it take and how often? And how much will it cost? While none of these issues are insurmountable, the ease of filling up with fuel at your local petrol station is hard to replicate on a mass scale.
EVs are hugely topical and it is easy (and lazy) to directly extrapolate their impact on the global demand for oil. There are a number of other factors that we must consider: global GDP growth, industrial usage of oil, and how emerging market growth will offset OECD demand falls. As with all emerging technologies, the exact impact on consumer behaviour from EVs is difficult to anticipate. A new technology could emerge which can accelerate the pace of adoption. All we can say, with everything we know at this point, it that it is hard to see rapid mass adoption of EV and very difficult to see any dramatic shift in the demand for oil from passenger cars.
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