How The Transport Industry Is Shaping Oil Demand

It has been a bad start to the year for UK car manufacturing. Iconic UK-based automaker Jaguar Land Rover (JLR) announced job cuts of up to 5,000 from its UK workforce of 40,000, while Ford Europe unveiled a major cost-cutting review of its European operations.

It would be easy to blame Brexit, but this is not what is driving change. It is the slowdown in Chinese orders and falling consumer interest in diesel engine vehicles.

Both JLR and Ford are looking towards transformative reorganizations for a future in which electric cars rather than diesel engines are the name of the game. While JLR will cut jobs in the UK, it will still build a new factory in Warwickshire to produce batteries, and its electric motors will be manufactured at its site in Wolverhampton.

According to a Reuters survey published January 10, automakers globally will invest $300 billion in electric vehicles (EVs) over the next 5 to 10 years, 45% of which will be in China, with 46% of the investment capital emanating from Germany.

It is evidence of the tectonic forces impacting the transportation sector, which accounts for just over 60% of oil demand. According to a recent report from energy consultants Wood Mackenzie, oil demand from transport will level out around 2030, leaving petrochemicals as the main, perhaps solitary, engine of growth.  

Diesel crunch

With the International Maritime Organisation's new rules on sulfur in marine fuel now less than a year away, diesel is likely to gain ground as a fuel of the high seas, leaving land transport increasingly to gasoline, electricity and LNG.

In 2017, gasoline car sales rose 3% globally, while sales of diesel engine cars and light commercial vehicles dropped 3.7%, a trend which preliminary data suggests continued in 2018. In Europe, where two in every three diesel cars are sold, the market share of diesel engines fell to 36.5% in first-half 2018 for the EU, down from 42.5% in the same period in 2017. Diesel engine sales plummeted 16%.

China's latest car sales data reinforce the changing structure of vehicle fleets. Chinese auto sales dropped 6% in 2018 to 22.7 million units, the first annual decline in new sales in 20 years in what is the world's biggest car market. However, sales of New Energy Vehicles (NEVs) jumped from about 780,000 in 2017 to over 1 million last year, with the China Association of Automobile Manufacturers forecasting NEV sales of 1.6 million units in 2019 even as overall auto sales remain flat or fall further.

The slowdown in Chinese autos sales in tandem with booming NEV purchases means the green slice of the pie is getting bigger, quicker.

Global EV sales

While China is the epicenter of the electric mobility revolution, globally EV sales had another strong year. Final year-end data is not yet available in key markets, but EV data specialists EV Volumes currently estimate passenger EV sales worldwide in 2018 at about 2.17 million, up from 1.28 million in 2017, bringing the cumulative number of light-duty passenger EVs on the world's roads to 5.47 million, 65% of them battery-only vehicles (BEVs).  

Electric commercial vehicles and buses grew by 155,000 last year, according to EV Volumes estimates, compared with 148,000 in 2017. The estimates for e-HDVs may be subject to more revision than those for light-duty EVs.

Steady rather than spectacular growth, but this is an industry still tooling up. E-bus sales expanded markedly in Europe and India last year after a strong 2017, suggesting the sector is gradually breaking out of its Chinese stronghold. The cumulative number of e-Heavy Duty Vehicles (e-HDVs) on the world's roads now amounts to an estimated 667,000, 86% of them BEVs.

Oil demand displacement

The numbers for oil demand displacement are beginning to mount as a result. The 5.47 million passenger car EVs account for about 110,000 b/d of unrealized oil demand, and e-HDVs, assuming about 15% are light-duty commercial vehicles, 241,000 b/d, bringing the global total to 351,000 b/d.

Most of this displacement is in China, which builds and hosts the majority of e-HDVs, as well as about half the world's passenger EVs.

China also has a steadily growing fleet of LNG-fuelled trucks. 96,000 were produced in 2017 up from 19,600 in 2016 and the momentum is unlikely to have stalled last year, suggesting the total fleet may be approaching 340,000. This would displace about 285,000 b/d of diesel demand. According to Shenzhen's clean energy transportation association, natural gas vehicles save RMB 2,500 to 3,000 ($370-$443) each month compared with diesel vehicles.

But even these numbers omit a major dimension to the changes in Chinese transportation - the explosion over the last decade and a half of electric bicycle and scooter ownership. By 2015, the number of electric two-wheelers in China had reached 200 million, with the vehicle population expected to grow by about 6.7% a year through 2020, suggesting that at end-2018 the number had reached about 244 million.

This is almost entirely a Chinese phenomenon, resulting from early city bans on gasoline motorbikes to improve air quality. In 2015, 85% of the world's electric two-wheelers were in China, according to Frost and Sullivan. By 2010, well ahead of significant electric car growth, there were 114 million electric two-wheelers on China's streets, going some way to explaining the country's rapid adoption of EVs both in terms of industrial production and consumer acceptance. 

The majority of electric two-wheelers run on lead-acid batteries although lithium-ion technology is gaining ground. These vehicles are cheap to buy and run. They are used in place of walking, cycling and bus or other mass transit options, but are also a major and growing means of commuting and light-weight urban goods delivery in China's congested metropoles -- further evidence that the options for meeting transport demand are increasingly less oil intensive.