Future of oil clouded by EVs
Demand for crude gets harder to predict
WASHINGTON — For years, the economists and analysts oil companies rely on to forecast energy demand far into the future have struggled to make sense of climate change.
On one hand, governments and corporations worldwide have pledged to slash greenhouse gas emissions, threatening to push oil from the linchpin of the world’s energy system to a footnote. But so far, those same actors have shown limited signs of making the hard choices that a wholesale reduction in greenhouse gas emissions would likely require. Seven years after world leaders agreed in Paris to work together to fight climate change, global emissions continue to rise.
Now, recent moves by government leaders to spur consumers to buy more electric vehicles, both in the United States and abroad, are creating greater uncertainty around predictions of sustained crude demand for decades to come — central to the economies of Texas and oil-producing regions around the world.
House and Senate Democrats have passed a climate and health care bill that includes almost $370 billion in clean energy incentives, which some analysts believe could drive electric vehicles to almost half of U.S. car sales by 2050. That follows a decision by the European Union to end the sale of cars that run on gasoline and diesel by 2035 and Chinese President Xi Jinping’s efforts to electrify China’s fastgrowing vehicle fleet, pledging in a speech earlier this year to put a stop to “near-term development gains at the expense of the environment.”
These and other developments have led analysts at S&P Global, a leading consulting firm whose annual CERAWeek conference is a see-and-be-seen event for the oil sector, to rethink some of their assumptions
about the pace at which oil demand will decline, said Jim Burkhard, the firm’s head of oil market research.
“The incredible thing is a lot of these commitments were made during the worst economic downturn we’ve seen since WWII when it wasn’t clear the economy was going to come roaring back,” Burkhard said. “The push for electrification has clearly gained a lot of momentum.”
As it stands now, oil companies and the consulting firms they employ predict a wide range of potential outcomes from the clean energy shift.
Companies such as BP, the European oil major, forecast oil demand peaking later this decade and then beginning a steady decline. By 2050, BP predicts, oil demand will have fallen almost 20 percent from today.
In contrast, Exxon Mobil predicts that as the global population grows, the world’s energy needs will only increase, pushing oil demand 10 percent above current levels in 2050.
Most are somewhere in the middle, but none of these forecasts accounts for governments actually hitting their goals of net-zero emissions by midcentury — which scientists say is necessary to avoid cataclysmic climate change.
“I’m generally optimistic that I’m going to be needed for a long time, and that’s what we tell our investors,” said Jud Walker, CEO of EnerVest, a privately held oil company in downtown Houston. “We’re not anti-transition, but it seems like we’re making some very hasty decisions.”
Achieving net-zero carbon emissions would require, among other things, nearly all the cars on the road to be electric, decimating oil markets. In the United States, for instance, the transportation sector accounts for two-thirds of crude demand.
But oil companies are projecting a much slower rollout. The energy consulting firm Wood Mackenzie is predicting electric vehicles will make up only 60 percent of new car sales in 2050. Considering that cars typically stay on the road 15 to 20 years, that leaves a lot of gasolineburning vehicles still on the road three decades from now.
“It’s new, it’s exciting and people want to talk about (electric vehicles) like it’s already over, but really it’s just starting,” said Ram Chandrasekaran, head of road transport research at Wood Mackenzie. “Maybe Norway can talk about how we (get to 100 percent electric vehicles on the road), but no other country is even close to having that conversation.”
The issue, he says, is that it will take time to build supply chains and infrastructure to produce and charge all these electric vehicles — and that’s presuming countries are even willing to do it. So far, only wealthy countries have made those commitments, with many developing countries likely to continue their embrace of traditional cars.
These models, however, don’t factor in the possibility of unforeseen change. It could be, for example, that automakers work the kinks out of self-driving car technology, and suddenly fleets of autonomous electric vehicles are motoring around cities. Or the more severe effects of climate change happen sooner rather than later, driving politicians to force gasoline-powered cars off the road altogether.
Those sort of ground-moving shifts are incredibly difficult to forecast, said Craig Pirrong a finance professor at the University of Houston.
“Nobody foresaw the shale revolution and the impact that would have,” he said. “In 2006, I was trying to put together a conference about the looming natural gas shortage, and within 18 months, that was completely obsolete. That was a technological shock, and with EVs a lot of it’s going to be driven by technology, as well as policy, and both are very hard to predict.”
If those events did come to pass, the fallout for the oil industry would be severe. In its latest outlook on the future of energy markets, BP said that if governments carry through on net-zero commitments, oil demand would decline more than 70 percent to just 25 million barrels a day in 2050.
They are not predicting that will actually happen, of course. But at the same time oil demand forecasts have steadily trended downward in recent years, as the costs of wind, solar and battery technology shrinks and governments ramp up their climate commitments.
“Ten, 15 years ago, oil demand for 2050 would have been 115 to 120 million barrels a day, not 97 million barrels a day,” Burkhard said. “You can’t predict the future, and in any outlook you make assumptions and try to be clear about them. The further you go out in time, the greater the range of potential outcomes.”
Were global oil demand to fall sharply, the repercussions for Texas would be severe. The oil and gas industry accounts for roughly 10 percent of the state’s economy — not as much as it did a few decades ago but still one of the state’s largest industries.
A study last year by the Center for Houston’s Future found that were the oil industry to suffer a severe decline, the Texas economy could take an annual hit of more than $150 billion. The state’s schools and universities, which rely on state oil and gas revenues for a large portion of their budgets, could face budget shortfalls of 20 percent.
Brett Perlman, CEO of the center, said while no one really knows when change is coming, it was inevitable oil would eventually be phased out of the global economy.
“Like they say, the stone age didn’t end for lack of rocks,” he said. “There’s a massive change underway, and over time we’ll use less fossil energy. That’s not going away.”