Dr.
Salman Ghouri[1]
and Dr. Amjad Ansari
Not too long ago, only the
wealthy and well to do could afford television and only handful of households
were connected with the direct telephone lines (a symbol of pride). In the
1950s and 1960 television was still largely in black and white, and for international
calls one had to make special arrangements with an operator. Today, following
20 years of the innovation, the cell phone has become the tool of choice not
only to make calls, but also to watch videos, take pictures, receive and send
written messages, follow the news, get directions (GPS), et cetera. Transportation
today is on the cusp of undergoing a similar transformation.
20th
Century: Internal Combustion Engine to Internal Innovation
If
the 18th and 19th century were the glory days of coal,
thanks to the industrial revolution, then surely the 20th century
belongs to oil. Oil was discovered in 1859, however its demand did not increase
until the innovation of internal combustion engine in the early 20th
century. During the 1950s and 1960s crude oil became an essential commodity as
America developed an appetite for heavy luxury cars. However, after the oil
price shock of 1970s, the auto industry quickly realized the implications and
challenges of higher oil prices and started manufacturing light weight and fuel
efficient cars. This era we called an
era of internal innovations adjustments for the survival of auto-industry in new
environment.
21st
Century: Structural Shift - Electric Cars
At the turn of the
century, the higher oil prices and global environmental challenges once again motivated
the auto-industry to innovate. This time, high on the agenda is a move away from
gasoline/diesel cars to electric/fuel cell cars. Also, the industry is looking
at manufacturing semi and fully autonomous cars. This era we call an era of
structural shift, the question regarding which is: how it will impact the oil
and gas industry?
The electric and fuel
cell cars have already become a reality today, though a decade or so ago they
were like a science fiction. The
technology is rapidly improving and it will be a matter of time, a few decades max,
before we see most of the road transport running on electric vehicles. The
question is how the penetration of EV will affect the growth of oil and gas
industry? Should one expect complete displacement of petroleum based vehicles
with electric cars suddenly, as in almost overnight? Or will fuel oil based
vehicles continue side by side with electric vehicles until electric once becomes
so cheap that the auto industry stops manufacturing fuel based vehicles? This
latter, most likely scenario would mean the transition would take 3 to 4
decades, during which time the oil and gas industry will have to come up with
new strategies to justify their existence.
Oil Demand in an Era of
EV and Renewables
According
to IEA,
at the end of 2012 the transport sector accounted for over 63% of total global
oil consumption of 3652 million tones of oil equivalent (mtoe). At present oil sources
most of the transport sector - aviation, navigation, road and railroad traffic,
and pipeline transport. One may safely assume that road transport covers 65% of
the total oil consumed in transport sector (although in some developed
countries this can be 70% or even higher), meaning that road transport consumes
roughly 38 million barrels per day (MMBD). Out of total global oil consumption of 92 MMBD in 2014 (92*0.65*0.63=38), 63% associated with road transport.
This oil demand will be
significantly reduced by the adoption of electric vehicles. And will be further reduced once the semi-autonomous and fully autonomous cars that will be shaping
the 21st century auto industry come into the market.
Another technology that could reduce oil demand from its current levels is drone. It can be foreseen, namely, that in the future electrically powered drones will be taking the role of cars in many activities, most prominently home delivery of packages and groceries.
These
change would support natural gas demand as natural gas is at present the best
option for power generation (considering coals negative impact on the
environment). Something to consider, however, is the fact that continuing technological
advancements in renewables could make households self sufficient in energy. For
example, installing solar panels on the house roof top could at one stage generate
sufficient electricity to not only meet the daily electricity requirements of
the household but also charge their electric cars batteries. The role of oil in
the energy mix would then substantially reduce.
Conclusion
Continued
innovation in the auto industry and renewable sources of energy would severely
affect the global demand for oil. This reduction in global oil demand in road
transport sector will be highly dependent on the penetration rate of electric
vehicles and the introduction of semi and fully autonomous vehicles. This means
that instead of assuming continued growth in oil demand, the oil & gas
companies should perhaps prepare for a world in which oil demand is significantly
reduced. In other words, just as the auto-industry is doing now, the oil and
gas industry too might have to reinvent itself in order to survive the 21st
century.
Note:
This article published today (Feb 5, 2016) oilvoice
[1] Dr. Ghouri is an
Oil & Gas advisor who advises industry leaders, investment bankers and
politicians through global / regional long-term energy market forecasts,
macroeconomic analysis and market assessments.
