US Gasoline Demand – A Prime Driver Reverses

US Gasoline Demand has slumped so far in 2017 – that could start to matter a lot, as it drives global oil demand

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How to Underestimate EV Demand

As the auto industry enters version 2.0, forecasting future sales of EVs is a crucial piece of work. But most projections, especially from the oil industry, use the wrong curve, and so underestimate demand.

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The First Law of Thermodynamics – Energy Is Becoming a Buyer’s Market

Energy cannot be created or destroyed, but can be altered from one state to another (1).

Oil Supply Dwarfs Demand – Official

“There is an abundance of oil: known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond.” Spencer Dale, BP Chief Economist, from BP Energy Outlook, Jan 2017.

Here is a chart from BP in their latest annual Energy Outlook, that confirms as predicted, the oil age will not end due to lack of oil.

 

A key finding in BP’s Energy Outlook, that is discussed at length, is the fact that whilst proven world oil reserves have been growing at a rate of about 3% pa for the last 30 years, oil demand has slowed to under 1% in the past decade.

These Proven Reserves, technically and economically viable today, have also concentrated into three areas: OPEC, Russia and the US, three of the lowest cost regions for oil extraction and production in the world.

At the same time, oil demand has started to weaken considerably, and tend toward plateau, or even peak.

So, in BP’s straightforward analysis, looking out even beyond 2050, cumulative demand amounts only to half of today’s viably recoverable oil reserves.

Technology investment has done its part in providing enough resources – the industry players now have to figure out how to manage their exits.

We now enter oil’s long end game of managing deteriorating demand, and abundant supply.

Deteriorating Demand – Peak Gasoline

There is a detailed debate in the Outlook regarding transport fuel demand, as this is a key element of future oil consumption. It centres on EV penetration,  but in reality it’s the changing global structure of transportation that is more important.

Peak transport oil demand is imminent because the growth areas of oil consumption such as China and India, show very different characteristics to the current OECD transport picture, dominated by US consumption.

The US consumes almost 50% of global gasoline but with just 30% of its cars because it is a major outlier in terms of very high annual travelled miles and low fuel efficiency.

Global VMT per capita                  Vehicle fuel efficiency

  

Sources –     Australian Department of Infrastructure global review and  IEA, WEO 2016,

Future growth will therefore be shaped more by the way China, India and the EU use their vehicles.

As other studies have shown, they are likely to drive less, and be more fuel efficient.

BP looks at various downsides for fuel demand due to EVs or the emergence of mobility services such as autonomous vehicles – but the simple maths of the RoW usage patterns dominating future global demand suggest the following demand curve.

 

dollarsperbbl estimate: Based on following annual projections –  Global ICE fleet 900 million, 14,800 VMT per vehicle with -1%, pa decline.  fuel efficiency 8.5l/100km and decrease -2.4%, global fleet growth of 2%pa and annual scrappage of 4.5%, EV growth rates leading to 10% total fleet 2030, 20% by 2035 (35% of annual sales). 

This indicates fuel peak demand by 2019-20,  and the shape of the demand curve is in line with BP’s Electric Revolution scenario, which also includes ride sharing, and autonomous vehicle usage, not considered in detail in the above.

A near-term shallow peak followed by accelerating decline: the key message is obvious – to a good approximation we are at Peak Fuel demand.

A key point to note is that the shallow peak is a brute consequence of more compressed global driving distances and overall fuel efficiency, so-called automobility – and not reliant on EV demand; EV demand does kick in later, and creates the accelerated decline. But the saturated driving patterns cause the current demand squeeze.

To reiterate, whatever the future brings in terms of EVs, autonomous driving and mobility as a service, it certainly will not deliver another 250 million US-style vehicle drivers with high fuel consumption internal combustion engines, and large annual travel distances. That is the core difference, and why peak oil demand draws closer.

In terms of overall transportation, BP also looks to trucks for more consumption, but these are just as susceptible to the efficiency, electrification and travel trends as for cars. In addition, the major growth economies of Asia are moving into consumer-led growth rather than industrial and construction-led growth, reducing energy intensity.

As gasoline and diesel fuel make up around 65% of the total crude oil barrel, this plateau of fuel demand drives the total crude picture suggesting peak demand in imminent, in the 2019-20 timeframe – in contrast to the BP business-as-usual projections that has continued growth for the next two decades, but aligned with their downside scenarios.

The Abundance of Oil
However, in the shadow of BP’s statement about the “abundance of oil”, this milestone of a rapidly approaching peak in oil demand is almost a footnote,

Whether oil peaks now or sits becalmed for a decade, the aggregate demand requirement will fall within a relatively narrow aggregate range of 600-700 billion barrels out to 2035.

Either way, demand is “dwarfed” by the accessible reserves of up to 2.5 trillion barrels we have at our disposal, amounting to 3-4 times the requirement to 2035.

So, lost in the whole debate regarding the precision of when peak oil demand might occur is the oversized fact that after decades of pursuing greater than 100% reserves replacements and production increases at the cost of several trillion dollars, the national and international oil companies, along with newer players in the vast tight oil deposits of the US, have created a massive stockpile of accessible and economic oil resources, the majority of which will likely not be required.

Highlighting this, BP is questioning the industry orthodoxy – a reliance on smooth upward projections of demand, and constrained supply – that has caused most players to pursue these vast investments in exploration, reserves replacement and production.

And this orthodoxy has seen returns on equity shrink to below 2-3%.

The overall result – a massive over-abundance of stones oil.

BP is now calling this dislocation and suggesting a new set of strategies will be needed.

But for now, the central projections of BP’s Outlook clearly suggest they themselves will continue with the standard model.

So as of today, despite reserves dwarfing demand, the industry continues to add aggressively to the reserves base.

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For the UK, 2016 Was Likely the Year of Peak Demand for Internal Combustion Cars

The Car Market In the UK Has Now Fundamentally Changed

2016 probably marked the peak of sales growth for conventionally-fuelled, non-electric internal-combustion vehicles in the UK – meaning they are now likely in long-term sales decline.

A short-hand way of describing this is “Peak ICE”, Peak Demand for Internal Combustion Engines – and it has now occurred.

Cars have started to become more like devices rather than stand-alone commodities.

Peak ICE in the UK

To see how this works, let’s focus on UK car sales over the past few years.

For motor manufacturers the trend in growth is as important, if not more so, than the actual sales number – are sales growing each year or declining?

Total new car registrations (a close match for sales) in the UK 2010 – 2016 are summarised below – data sourced from SMMT here.

On the face of it this shows an upward trend of new car sales from 2011 to 2016, although actual numbers are only just above a previous peak over a decade ago in 2003.

To be precise, in 2016 in the UK 2.69 million new vehicles were sold, versus 2.63 in 2015 – so incremental growth of about 60,000 cars, or 2.3%.

It seems obvious that in the UK car sales are growing. But that single growth percentage number masks two distinct types of increase.

There are in fact now three discrete types of mass-market car available in the UK (and globally) in significant numbers (1): conventional internal combustion engine vehicles (ICE), hybrid petrol-electric vehicles and plug-in hybrid and full electric vehicle (HEV/PHEV/EV).

Whilst overall UK car sales have grown steadily, the sales of HEV/PHEV and EV automobiles have grown far faster.

In 2016, Conventional UK ICE sales grew by 1.6% to 2.60 million units from 2.56.

But sales of UK hybrid and plug-in vehicles grew by 25% to almost 90,000 sales, from 71,000 in 2015.

This means that of the 60,000 vehicles of extra growth sold in 2016 over 2015, 40,000 were conventional, but 20,000 hybrid or electric. So, alternative vehicles constituted 33% of new sales growth, and up from 15% the year before.

Put another way, although EVs and hybrids were only 3.3% of total UK sales in 2016, they constituted 33% of the growth is sales.

It’s an important distinction.

This is the sort of information financial markets and automotive manufacturers do not miss. As we have noted before, any major OEM who decides to concentrate all of their investment and innovation into conventional ICE vehicles is now betting their capital on a declining market, and potentially avoiding the large growth of hybrids, plug-in hybrids and all-electric vehicles along with their new features such as autonomy and software services.

This increase in new model offers is now critically important in the UK because near-term sales of all passenger cars are forecast to actually fall in 2017 and 2018. SMMT now predict a decrease in total UK car sales of about 5% in 2017 and 1.3% in 2018 due to sterling weakness and economic uncertainty.

However, the growth in UK hybrid and EV sales is likely to continue at strong positive rates due to at least three factors: general price and running costs reductions plus government incentives, greater infrastructure access (the UK is leading Europe in this regard), and heavier marketing of plug-in and hybrid vehicles by automotive firms.

Add to this the base rate momentum of growth, and we can reasonably assume that non-conventional vehicles will continue to grow rapidly in market share.

If we suppose that a downturn in UK sales of 5% will also slow the pace of electric and hybrid growth from 25% in 2016 to 20% in 2017 and 2018, we can simply model the overall shape of the new vehicle demand picture below, showing the trends in both ICE vehicle and electrified vehicle/hybrid demand.

If this is run further forward until 2025 with 20% EV/plug-in/hybrid growth assumed, and flat for all vehicles, the trend is clearer.

Note alternative scenarios show the same feature – Peak ICE – even if EV sales weaken to say 10% growth rather than 20%, and ICE sales drop only by 2-3% this year rather than 5%.

In fact, even if hybrid vehicles are excluded from the tally as they are not plug-in electrics, the same trend still emerges – the growth in EV/PHEVs becomes too large for future growth of ICE vehicles to ever regain a positive trend.

The bottom line is that sales of ICE cars have peaked under almost every reasonable scenario. This is simply because conventional ICE vehicles in the UK have reached a plateau and downturn in sales at the very same time as the investment and availability of plug-in and hybrid car models has taken off, along with supporting infrastructure.

Timing is everything.

2016 was indeed Peak ICE for the UK automotive market.

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2017: 21st Century Energy Gets Underway

2017  is the year when all energy eyes will be on OPEC and the US, but that will miss the beginning of the broader conversion from 20th century to 21st century energy. The incremental growth in energy demand will be mostly consumed by scalable solar and wind technologies, forcing existing fuels into long-term decline.

Centuries may not get into their stride for a decade or two.

This blog assumes that there is a major energy transition underway: from a 20th century model to a 21st one, from a giant-size but inflexible, extractive and stand-alone system, to a more scalable, manufactured and grid-connected version.

Now, with its sixteenth year about to close, maybe this century has had enough time to show itself in terms of the start of this conversion.

On that basis, we will briefly look at three large-scale themes in the energy world, and see how they played out in 2016 – and what that might mean for 2017 and beyond:

• Incremental Growth versus Total Supply,
• The Relentless Rise of Scalable Technologies, and
• The Manufacturing of Global Energy

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