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Electric Vehicles Won’t Kill Off Oil Demand Anytime Soon

EV interior

Before you start furiously typing out a retort, hear me out. First, I want to make it clear what I am not skeptical about. I am not skeptical about electric vehicles (EVs) continuing to grow rapidly for the foreseeable future. Indeed, I believe that will happen — although growth has slowed in the U.S. in recent years.

I am also not skeptical over the fact that EVs make sense for many people. Indeed, I would buy one myself if I could justify it economically. I have only put about 5,000 miles on my car in the past 2 years, so it’s hard to justify any sort of premium that could be paid off by fuel savings.

I am also not skeptical that EVs will get cheaper, and that improvements in batteries will extend their range. I believe tomorrow’s EV will be much better than today’s.

So far, so good. On these three points, I am on the same page with the most rabid EV enthusiast. But I am extremely skeptical about one thing.

I am skeptical that EVs are going to make any dent in our oil consumption in the foreseeable future.

Let me explain why by first examining global crude oil demand growth over the past three decades. In the 32 years since 1984, global crude oil demand has increased by 36 million barrels per day (bpd) – an average annual increase of 1.1 million bpd per year:

(Click to enlarge)

Year-over-year crude oil demand declined in only 3 of those 32 years, and in each case bounced back to the historical growth rate very quickly. Further, the average annual increase since 2010 has been well above the historical average at more than 1.5 million bpd per year.

Of course that’s history, which merely gives us an indication that the long-term trends for oil consumption have been up for a long time. The reason they continue to grow is that growth is being driven by developing countries. Demand in developed countries has been falling (although U.S. gasoline demand is at a record high this year). But that graph admittedly doesn’t necessarily tell us about the future. So we have to look for examples that may give some insight into the future.

I first give you Norway. Following years of very generous subsidies for EVs, Norway has the largest fleet of plug-in EVs per capita in the world. Norway’s growth rate for EVs has been higher than that of any other country, averaging an amazing 110 percent per year for the past seven years:

(Click to enlarge)

One would expect a decline in Norway’s oil consumption given those trends. After all, Norway is surrounded by members of the European Union (EU), where demand for oil since 2008 is down 14 percent (primarily in response to much higher oil prices). Nearby countries like Denmark (-14 percent), Sweden (-16 percent), and Finland (-21 percent) all had big declines. Related: Forget Inventories – Drilling Cutbacks Will Lead To Much Higher Oil Prices

But not Norway. Norway’s consumption has trended slightly higher while all the countries around it experienced double-digit declines in petroleum demand since 2008.

(Click to enlarge)

Some may immediately note that Norway’s consumption has been relatively flat for several years, but keep in mind that demand was declining across the developed world in response to $100/bbl oil. So what happened in Norway? Shouldn’t demand there have declined at least as much as in countries that didn’t have explosive EV growth? Related: Exxon Misses Estimates By A Mile, Plunges To Two-Month Lows

The reason the huge growth in electric vehicles didn’t translate into a reduction in demand in Norway is because it is set against a backdrop of a rising population and a growing fleet of vehicles on the roads (as is the case worldwide). The problem is that the conventional car fleet is adding cars faster than EVs are adding cars:

(Click to enlarge)

Also important to note that Norway is adding a lot of diesel engines to the fleet, another factor that helps explain the flattening in their oil demand. But, as the graph shows since 2008 they added about 300,000 diesel and gasoline cars to the roads, but despite the explosive growth in EVs the total over the same time period is only about 80,000 cars. And Norway’s explosive EV growth rate is starting to slow as the country scales back its generous subsidies.

Consider that in the U.S., from 2014 to 2015, new car sales of conventional internal combustion vehicles increased from 16.5 million to 17.5 million. Yet EV sales in the U.S. actually decreased from 122,438 to 116,099. In other words, they have a very long way to go to even dent the growth in conventional new car sales, much less make an actual reduction in the fleet.

This is essentially the problem with most projections that assume that EVs will soon take a big bite out of oil consumption. The world currently consumes over 90 million barrels per day (bpd) of crude oil. That number is growing by more than 1 million bpd each year, yet most projections fail to account for this growth that is due to growing population, more people driving, etc. Like what happened in Norway.

A recent Bloomberg article made this very mistake by assuming that fantastic growth rates in EVs could globally displace 2 million bpd by 2023, and that could crash oil prices. The only problem is that even in the unlikely event that EVs displaced 2 million bpd of demand, then global crude oil demand may only be 5 million bpd higher than it is today instead of 7. They assumed it would be 2 million bpd lower than today, again ignoring growth (and the reasons for that growth).

In any case, according to data at Inside EVs, in the U.S. 2016 EV sales year-to-date (YTD) are only about 16 percent higher than YTD sales a year ago. That would project to maybe an additional 20,000 EVs sold in the U.S. to reach nearly 140,000. Again, that’s against the backdrop of a fleet of 17.5 million conventional cars that increased sales by a million cars from the previous year.

Globally, EV sales are running 43 percent ahead of last year’s pace. That’s far behind Norway’s blistering pace that failed to reduce oil consumption, and well behind the 60 percent growth rate assumed by the Bloomberg article to cause a 2 million bpd drop in demand by 2023. If they assumed a lower growth rate of 45 percent — still unreasonably high in my view — they don’t impact 2 million bpd of demand until 2028. That’s another 5 years of demand growth for oil, but also importantly another 5 years of depletion of existing fields. Oil demand won’t continue to grow forever, because ultimately depletion will catch up and force prices much higher. In that case, what will happen isn’t the price crash that Bloomberg predicted, it’s the exact opposite.

We certainly need EVs, but I haven’t seen anyone put together a credible mathematical case that they will even arrest the growth in oil demand over the next decade. Inevitably, they rely on faulty assumptions of fantastic EV growth rates and zero growth for oil — which is contrary to our observations.

That’s why I am skeptical. If you project out far enough then indeed you can see EVs making a dent, but that’s far further into the future than proponents like to admit, and oil prices are likely to be much higher — not lower — when that happens.

By Robert Rapier

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Leave a comment
  • MagdaJ on July 31 2016 said:
    "EVs making a dent, but that’s far further into the future" I'm guessing at least 50 years! If any major event changes the current trend of societies and "human" thinking.
  • XXYYZZ on July 31 2016 said:
    The bright point is the technology for EV has matured enough that if for some reason we needed to rely on it, we could, it is just not full competitive at this stage.

    As the author says, I am in a similar position, I would love at least one all electric car in the family - both my wife and I are only 5-6km from work and even when I do the school run past both schools, to work and then back again in the after noon would struggle to drive 20km most days.

    We are probably the perfect family for possibly even two electric vehicles, with a Hilux diesel or similar sitting in the garage for longer trips, towing and camping, but we can't really justify abandoning our sunk costs for the savings in running costs right now on our 18 year old Mercedes and 12 year old Corolla.
  • EH on July 31 2016 said:
    For a guy so sure of his theory, he sure took the long winded way around the barn to convince himself and us, must hav Alden Observed Tesla coming along with Faraday and the rest in his rear view mirror.
  • EdBCN on August 01 2016 said:
    I think the thing to remember is that the large existing fleet and the 10-15 year life span of vehicles means that, assuming EVs gain market share fairly quickly, when EVs have a 10% market share, they will still make up well less than 1% of the fleet on the road. So their impact on the new car market will precede their impact on gas demand by many years.
  • ricegf on August 01 2016 said:
    I believe that the author makes a significant unstated assumption - that Electric Vehicles (EVs) will continue to command a premium over gas- and diesel-fueled vehicles (commonly called Internal Combustion Engine Vehicles or ICEVs) over the next decade and thus continue to capture a relatively small portion of the market for the foreseeable future.

    This may be true, but trends in battery prices indicate otherwise. This is significant because EVs are mechanically much simpler than ICEVs, and thus battery costs largely determine EV cost.

    IF those trends continue, then around 2022 the price of a new EV with over 200 miles of range is expected to drop below that of a comparable ICEV for the first time in history. Before that happens, multiple fast charging networks in the developed world are expected be on-line to support long-range travel in EVs with roughly the same confidence as is provided by petrol stations today. In fact, Tesla's signature network will by completed by the end of 2016, although additional stations are planned to meet the increased demand expected as the Model 3 (with around 373,000 paid reservations) rolls out.

    Given EVs numerous other advantages - overnight charging at home, remarkably low operational and maintenance costs, very fast and smooth acceleration, silent operation, greater cargo space, etc. - the slow growth of the EV market share MAY accelerate rapidly by 2025 and result in an actual drop in ICEV sales.

    ICEVs have a median age of around 11 years in the USA, so the impact to oil consumption would likely not be seen until 2035 - well outside the "over the next decade" time frame of the author's analysis. However, the rise of iPhone-like smart phones, personal computers, and the Internet happened much faster than even the most ardent advocates' predictions.

    It could happen here, too. Time will tell.
  • GregSS on August 01 2016 said:
    I guess it all depends on Robert's definition of "soon".
    It think by 2020 EV's will really start taking off. How long will it be before they start putting a dent in oil? Not sure... maybe 2025...maybe 2030, but it will happen
  • JHM on August 01 2016 said:
    Here is the critical threshold: Oil consumption will decline after EV sales exceed 25 million per year.

    Why? 25 million EVs (and other plug in vehicles) offset demand for about 1 mb/d of gas and diesel. So when this much offset happen in a single year it offsets pretty much all the growth opportunity for oil. Thus, past this threshold demand for oil falls year after year as more than 25 million EVs are added each year.

    When? The is just a question of how fast will global EVs sales grow in the coming years. 2015 saw global sales of about 550k plug-ins. Growing at just 15% annually gets to 25 million EVs in 27 years, 2042. This is wildly optimistic scenario for the oil industry, and the author can argue for it if he wishes. Let's consider slightly faster rate, 30%, which happens to be rate at which solar has been advancing for many decades. At 30% growth rate, the 25 million EV critical threshold is reached in 14.5 years, 2030. However, EVs have actually been growing in the 45% to 60%. So we reach the critical point in 10.25 to 8.12 years, that is, 2023 to 2026.

    It is important that the oil industry not be so naïve about EVs as this author seems to be. There is a very real threat that Peak oil demand will come much faster than any oil investors would like to believe. The peak really could come as soon as 2023, and oil investors need to be prepared for such a scenario.

    Once this peak happens it will be almost impossible to avoid a protracted multi-decade glut. This has a very real impact NOW on the present value of oil reserves. That is, depending on the pace of EV disruption reserves loose value eventually. Even the uncertainty of this pace of disruption should add to the discount placed on reserves. Thus, the present value of reserves is already falling. We see this already driving investments out of oil exploration. New oil reserves are no longer worth $10/b just to discover and sit on for decades. Further the shift in Saudi oil strategy can easily be understood as a response to falling present value of reserves. It is more profitable for the Saudis and others to keep drilling and increasing oil supply two years into a glut than to sit on oil reserves and watch them loose value.

    The ongoing oil glut is in fact a rational response to the very real threat of disruption from EVs and other efficiency technologies, even if that peak in consumption is more than ten years away. Moreover, the only way for the oil industry to keep growing consumption in the short-run is to keep oil so cheap that most producers go bankrupt. Don't believe me? Go ahead see how fast global EVs take off should oil trade above $80/b again. Even the author would buy an EV if the price of gasoline were higher. Real economic demand is falling off, and present consumption is only supported by unprofitably low prices. This is why the Saudis and others will pump like there's no tomorrow.
  • Stephen Leslie on August 02 2016 said:
    The latest electric vehicles will drive themselves, this will lead to more carpooling, reduced insurance costs and virtually zero parking charges. The drop in those costs combined with fuel savings, reduced road tax and increased economies of scale in the manufacturing process will drive the EV revolution, diesel and petrol cars will still be on the road however just like landline phones and fax machines, technology advances will soon make them redundant.

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