Ross McCracken, managing editor of Platts analytical monthly newsletter Energy Economist, has been analyzing global crude markets since 2001. Using this experience, he looks ahead in this post to assess what could be the most profound shock both to global oil and electricity markets in their history: the electrification of road transport.
The number of electric vehicles (EVs) on the world’s roads hit the one million mark in third-quarter 2015 and sales are growing fast. If, and it is still a big if, EVs demonstrate an exponential rate of deployment, similar to solar PV panels, it could have a profound impact on both oil and electricity demand, and by extension the very basis of world primary energy supply.
Recent forecasts have suggested that at a 30% annual growth rate in EV sales would result in as much as 2 million b/d of oil demand being displaced by 2028, while at the same time adding 2,700 TWh to electricity demand globally by 2040.
An EV, which means plug-in hybrid vehicles (PHEVs) and battery-only vehicles (BEVS), uses 0.3 kWh of electricity per mile. So the total electricity demand in a year equals the number of EVs times the number of miles travelled annually times 0.3.
The amount of oil demand displaced in barrels/day equals the number of EVs times the number of miles travelled in a year divided by the average miles per gallon of internal combustion engines (ICE) divided by 365, divided by 42, the number of gallons in a barrel.
As such, the critical variables are the growth in the number of EVs on the road, the evolution of mpg and the number of miles each EV is assumed to travel.
Fuel efficiency is expected to rise in both high and low EV penetration scenarios driven by regulation, from somewhere around 17-24 mpg in 2015 to 45 mpg in 2040. So, although a major variable, there appears to be a rough consensus about its evolution.
The number of miles travelled is more contentious and has a huge impact on the expected outcome. In a recent report by Bloomberg New Energy Finance, the miles travelled per EV is assumed to rise on average from 8,700 a year in 2015 to 22,420 in 2040. BNEF sees all ICE Light Duty Vehicles travelling 23,500 miles a year in 2040.
This huge increase in miles travelled comes about as a result of autonomous driving, ride sharing services and other new mobility business models, according to BNEF. However, it is a big assumption; the trend is in fact down not up. The number of miles driven per car per year in the UK, for example, fell from 9,200 miles in 2002 to 7,900 in 2014, according to the RAC Foundation.
The number of EVs on the road is also open to question. Oil major ExxonMobil – a conservative counterpoint to BNEF’s enthusiasm for all things renewable – sees 50 million EVs on the road by 2040, compared with BNEF’s 400 million. Exxon’s assumption still represents growth in the number of EVs of about 14% a year on average out to 2040. The oil company assumes widespread adoption of conventional hybrids as the most economic option for consumers.
As a result, the range of possible outcomes is huge. If mileage is assumed to be flat then under Exxon’s scenario, oil displaced by EVs in 2040 amounts to a meagre 0.83 million b/d. At the other extreme, if BNEF’s high growth rates/high mileage assumptions are adopted then the figure comes out at a headline grabbing 13 million b/d.
The impact on global electricity demand would be again be minor in Exxon’s scenario, and much larger in BNEF’s at 2,700 TWh in 2040, equivalent to 11.4% of global electricity generation in 2014.
If a compromise is reached – say flat mileage of 11,500 in line with current LDV usage in the US, and BNEF’s high growth rate is adopted – the impact is 6.7 million b/d of oil displaced in 2040 and an additional 1,385 TWh of electricity consumed.
However, even this does not provide the whole picture. BNEF considers only LDVs, but there is a lot more to transport than that – heavy-duty vehicles , trains, planes and ships. Moreover, Exxon says this is where the growth in energy demand for transportation will come from, not from the LDV sector.
Global GDP will double by 2040 based on fairly conservative economic assumptions, so there will be a huge expansion in commercial transport. Exxon does sees electricity and natural gas making inroads, but not sufficiently so to overcome the increase in demand for oil from the growth in commercial transport.
If this part of the forecast proves correct, then the impact on oil demand of higher EV sales, even combined with higher mileage assumptions, could be swallowed up by the overall expansion in transport so that oil use continues to grow. EV growth and fuel efficiency will both retard oil demand, but they do not necessarily mean that oil demand will contract.
EV sales and driving patterns are clearly key variables to watch. As the cost of lithium-ion batteries falls, regulatory support grows and consumer sentiment shifts, they could produce the kind of exponential growth curve that other disruptive clean technologies have shown.
This would provide a new area of electricity demand growth for an industry sorely in need of one, at least in the OECD. It would create a massive amount of storage capacity. And it would put a significant break on oil demand growth. But as to the overall impact, it is better not to leap to conclusions just yet.
A fuller analysis of both the ExxonMobil and BNEF scenarios for the transportation sector is available in the April 1 edition of Energy Economist.
Learn more about how our leading specialists provide unique insight how the latest commodity market trends could affect your business and trading decisions. Insights. Informed.