On March 1, 2018 the Center on Global Energy Policy hosted a workshop as part of our Peak Oil Demand initiative. The following text constitutes a summary that aims to capture some of the takeaways from the latest discussion, without attributing them to individual participants.
Presentation of CGEP Study & Preliminary Findings
- Major forecasting institutions have been moving forward expectations of peak demand. Industry is under particular pressure to do so and as a result there is a risk ofunderinvestment in the upstream. This may in turn have the unintended consequence ofcreating shortages in supply and causing a disorderly move away from oil rather than a smooth, policy-driven shift.
- CGEP study aims to challenge conventional wisdom and focus on aspects of long term oil demand that are understudied. And, while sector-by-sector analyses are useful, there is also an opportunity to “slice and dice” the demand barrel differently in a way that reflects the complexity and interconnectedness of the peak demand question. For example, while the agricultural sector, as it is traditionally defined, accounts for only a small part of total oil demand, if we were to factor in the full food chain (i.e. not only diesel use by farm equipment and petrochemical fertilizer demand, but also packaging, distribution, and waste disposal), oil demand associated with agriculture could be as high as 30%. We will also observe feedback loops and implications of changes in demand, such as the price / demand interaction, implications for refiners of uneven demand contraction between fuel types, and the geopolitical implications of peak oil demand.
- Although the passenger vehicle sector only represents about a quarter of total global oil demand, and is typically not viewed as a growth sector due to efficiency gains, and even independent from expectations of electric vehicle (EV) penetration, it is still a major area of divergence between existing long-term oil demand forecasts. Given the amount ofwork already undertaken on the passenger vehicle sector, CGEP’s initial approach has been to better understand existing forecasts, their underlying assumptions, and why they reach such varied conclusions.
- To do so, CGEP conducted an anonymous survey of 15 forecasters; aggregate results show key differences in assumptions about underlying macro drivers (population growth, protectionism and geopolitical risks, climate change, and regional differences), EV penetrations (number of vehicles and miles driven), and battery costs. Notably, no forecast anticipates significant EV penetration prior to 2020, but over the subsequent 20 years views vary widely.
- Future CGEP analysis of the passenger vehicle sector, and road transport sector more broadly, will focus on the impacts of automation and shared mobility (including public sentiment), government mandates and policies, and battery costs supply chain issues.
- With respect to macro drivers of oil demand, GDP and population growth have historically been key determinants, followed by oil prices. Going forward, urbanization and the way in which cities develop will be a critical driver of oil demand.
- Cities are significantly more energy and fossil fuel intensive than rural areas, but also derive greater productivity from that energy use. While efficiency gains feature prominently, energy intensity of cities is increasing and will likely continue to increase in the near-term due to heavier overall use, and expectations of near-universal GDP growth. Electrification, digitalization, and automation are key risks to oil demand growth. “Smart cities” rely on getting policy and economics right, with increased income, health outcomes, and other benefits.
The Role of Efficiency in Long-Term Oil Demand
- Changes in the passenger vehicles sector are slowing the expected rate of global oil demand growth, but fuel economy improvements are slowing down, and non-OECD fuel economy improvements are outpacing OECD improvements. Fuel economy improvement rates continue to run well below the rate of improvement required to meet the 2030 GFEI target.
- By 2040 the IEA expects a combination of efficiency gains, EVs and other fuel switching to displace 19 mbd of potential oil demand for passenger cars. But trucks also matter a lot and are a blind spot in discussion of long term demand trends; trucks have accounted for nearly 40% of global oil demand growth since 2000. Road transport accounts for only 20% of freight movements, but consumes more than 70% of the oil used for freight movements.
- Policy matters significantly for both fuel economy and EV adoption. Efficiency is the single most effective instrument for shaping future consumption trends, but ends to stagnate in the absence of policy. EV sales are heavily geographically concentrated in countries with incentives. Prices and consumer sentiment/preferences drive behavior in the absence ofpolicy.
Current State of Battery Technology
- The advantages of lithium ion batteries are their high volumetric energy density and high gravimetric energy density – or in other words, the ability to pack a lot of energy into a smaller and lighter package, which is crucial for portability. Lithium ion batteries were developed in the US and commercialized in Asia.
- In choosing battery materials, energy (how long a single charge lasts) and power (rate ofstart up) are key considerations. Safety and cost are of course also variables. Notably, some battery components, such as carbon black, are petrochemicals and therefore have implications for oil demand.
- Battery costs have already come down substantially, having started at $2,000/kWh in the 1970s, and falling to $350/kWh in 2015. The Department of Energy hopes to achieve $80/kWh with economies of scale. Materials matter for cost. Research is focused on reducing high cost material without sacrificing energy density or safety. Battery life is also key to assessing the cost of ownership, as opposed to just the initial cost of the battery which is often the focus. Full battery lifecycle analysis is also important to managing the positive or negative costs associated with battery disposal, recycling, or repurposing.
Implications of Peak Oil Demand for Producer Countries
- The perception that investors, policy makers, and the public in general have of the potential for peak oil demand will impact upstream investment, and ultimately oil supply. The investment needed to develop new reserves is still massive.
- The potential for vehicle demand erosion is one reason why producing countries (and major oil companies) are increasing investment in petrochemicals.
- Major producing countries have been working on diversification for decades, but still struggle with dependence on oil revenues. Transition away from oil has political, social, and economic impacts. Peak demand does not mean that oil demand will fall off a cliff at that point; major oil producers will continue to play a residual supplier role for at least the next two decades. Gulf producers have a particularly favorable position in this respect. While diversification is critical, it is also essential to maximize and optimize the oil sector.
- Revenue maximization in a reasonable time horizon should be guiding principle, and requires new alliances between producers. Managing the upside of oil prices has always been, and continues to be, the bigger challenge than managing downside price risk, and this challenge is central to the oil demand question. If producers don't manage upside oil prices they risk a disorderly transition away from oil.
- Oil producing countries in the Gulf, let alone beyond the Gulf, are not homogenous, and differences between them are important.