Oil Demand's New Frontline

December 2017 Sarah Miller

Can oil demand really continue to grow beyond 2040, even if electric vehicles (EVs) spread quickly and cause gasoline use to peak within a few years? That's the comforting message for the oil industry coming from mainstream, baseline global demand forecasts, including the International Energy Agency's new 2017 World Energy Outlook. Just a couple of years ago, such forecasts tended to cite expanding oil-powered auto ownership in China and other developing economies as a virtual guarantee that oil use would rise indefinitely. Although surging EV sales have recently undermined that assumption, demand forecasts continue to point upward based on expected growth from diesel trucking, air transport and petrochemicals. But it's unlikely that an EV revolution would be an isolated affair -- the same forces that are transforming personal vehicle markets are also starting to drive change in trucks, buses and airplanes. Oil demand growth is a lot more vulnerable than baseline forecasts suggest.

The global economy is changing in huge and interrelated ways, driven by information technology (IT), environmental concerns and new consumer tastes and buying habits. Developments in one of these areas often affect others. Take batteries -- improvements in batteries for laptops and cell phones helped boost performance in car-sized batteries, which can also store electricity in homes and factories. They can be pulled into larger "packs" to power big buses and trucks, too. This means performance improvements or cost reductions for batteries potentially make gasoline, diesel, liquid industrial fuels and natural gas for power generation less competitive. Any breakthrough in hydrogen fuel cells would similarly reverberate in oil demand across multiple sectors.

Moreover, while falling costs for renewable electricity will make it more competitive with gas- and coal-fired power, they could also help EVs achieve total operating cost parity more quickly with gasoline and diesel vehicles. The simpler structure of EVs may in turn make fuel-saving self-driving technology more feasible. If self-driving vehicles encourage the "transport (or mobility) as a service" model alternative to private car ownership -- as auto and transport companies from Volvo to Uber are hoping -- an unintended consequence could be a reduction in the number of vehicles manufactured and sold globally.

The point isn't to predict the future but rather to highlight how interconnected these things all are and how dubious it is to assume rapid change on one front, such as EVs, and virtually no impact on related fronts such as trucks and buses. One thing is sure -- projections for growth in EV sales and the resulting impact on oil demand have increased dramatically of late. A year ago, in its 2016 World Energy Outlook, the IEA said in its base-case "New Policies Scenario" that there would be just over 150 million EVs on the road by 2040, of which two-thirds would be plug-in electric. And these EVs were projected to displace only a cumulative 1.4 million barrels per day in oil demand between 2016 and 2040.

In its 2017 "New Policies Scenario," however, the IEA has upped the projected number of EVs in 2040 by more than 85% to 280 million, and the impact on oil demand by nearly 80% to 2.5 million b/d. And even these new numbers are relatively conservative compared with some other forecasts. When combined with tougher fuel economy rules, the IEA now forecasts that this ballooning number of EVs will chop a much larger 13 million b/d off projected 2040 global oil demand.

Nonetheless, the "New Policies Scenario" assumes that diesel use in trucks and jet fuel consumption will remain unaffected. Booming demand for commercial transport fuel and also for oil-based petrochemical feedstocks should keep global oil consumption "on a rising trajectory to 105 million b/d by 2040," the IEA finds.

But if battery-powered electric motors succeed in passenger cars to the degree the IEA now expects them to, trucks probably won't be far behind, for several reasons. First, manufacturers expect to share components between cars and trucks, meaning commercial vehicles will benefit directly from many of the same technological breakthroughs and economies of scale as personal EVs. This applies, perhaps most importantly, to batteries, the biggest single factor in determining how cost competitive EVs of all types will be.

The phenomenon doesn't stop with batteries, however. The Tesla "Semi" long-haul heavy-duty truck unveiled by Elon Musk in November is a case in point. Musk said the Semi will be powered by four of the same electric motors used singly in the $35,000 Model-3, the car Tesla is hoping, somewhat behind schedule, to be mass producing by early next year. In addition, the spread of vehicle charging capacity along highways implied by widespread use of passenger EVs would simultaneously remove that constraint for long-distance truckers.

Truck Makers Get Onboard

The industrial developments needed to bring buses and trucks into line with the shift to personal EVs are starting to materialize. Tesla's launch of the Semi last month was the splashiest announcement to date of work on a fully electric commercial truck, but it wasn't the first or even necessarily most important. Germany's Daimler, maker of the ubiquitous Mercedes-Benz family of large and medium-sized trucks and buses, announced the week before that it already has an all-electric delivery truck, known as the Fuso eCanter, available on a lease-trial basis and being tested out in New York and elsewhere. Daimler also plans to start full-scale production of a first line of commercial vans next year, and to offer electric drive for all its Mercedes-Benz commercial van models soon thereafter.

Fuel-cell technology is well behind plug-in electric technology for trucks, just as it is for cars, due not least to the fact that there are fewer complementary uses for fuel cells than for batteries, and hence less benefit and fewer economies of scale from non-transport-related research. But fuel cells have potential weight advantages and Toyota -- at this stage, the technology’s biggest corporate backer -- is working with 7-Eleven Japan on a fuel-cell delivery vehicle that could be ready for testing by 2019. It is also reportedly testing a semi-trailer truck in California.

A recent McKinsey & Company study, New Reality: Electric Trucks and Their Implications on Energy Demand, shows electrification in the EU, China, and the US reaching "a tipping point" that reverses the global trend of growing diesel demand in the truck sector before 2030. "Beyond 2030, the continued uptake of eTrucks could displace up to 3.5 million b/d by 2050 (the equivalent of removing 40% of today's diesel demand from trucks) and even more in higher uptake scenarios," McKinsey says.

Even airplanes may not lag by all that much. European aircraft manufacturer Airbus, Germany's Siemens and engine maker Rolls Royce recently outlined plans to try out first one and then two electric motors on a short-haul passenger jet, effectively converting it to hybrid electric. It could be in service by 2020, they said. This follows word from UK budget carrier Easyjet back in September that it is working with US-based Wright Electric on a short-haul battery-propelled passenger aircraft that could be flying within the next decade.

How quickly moves of this sort will bear fruit in the aviation sector is at this early stage anybody's guess. But what everybody should understand is that the energy transition is now underway, and set to gain momentum -- not in one area, but across the board.

Sarah Miller is Editor-at-Large at Energy Intelligence, and a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.


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