Changing Lanes: a Roadmap for Transport and Future Energy Markets

S&P Global Platts
Written By: Andy Critchlow, Roman Kramarchuk, Mark Schwartz, Rocco Canonica, Nick Coleman and others
S&P Global Platts
Written By: Andy Critchlow, Roman Kramarchuk, Mark Schwartz, Rocco Canonica, Nick Coleman and others

Revolution is a misused term when it comes to road transport. Advances in battery technology and a growing awareness of climate change issues are putting the traditional internal combustion engine (ICE) under pressure like never before but predictions of its sudden demise look overblown. Oil is likely to play a central role in powering mobility for decades to come.

Oil’s advantages as a transport fuel are as applicable today as they were more than a century ago when the Model T Ford arguably triggered the last transport revolution because of its simplicity, reliability and economy. Rolling off some of the world’s first modern production lines the four-cylinder vehicle turned mass passenger-car ownership into a reality. The same refined products that fueled those early vehicles are still the most flexible and cost-effective ways for consumers to power their cars today despite volatile markets and alternative technologies.

Electric vehicles (EVs) may offer a glimpse of the future but for the time being their impact is limited. Despite improvements in battery technology range is limited even for the most expensive models, which still can’t compete with ICE cars as a complete package. S&P Global Platts Analytics forecasts that oil production will have to increase to meet rising demand for the next two decades. Meanwhile, demand for petrochemicals feedstock is expected to continue growing strongly, along with oil use in the marine and aviation sectors. Although vehicle manufacturers are increasingly investing in developing EV technology overall oil demand is still expected to exceed 100 million b/d this year, according to S&P Global Platts Analytics estimates.

What EVs Mean for the Energy System

Population growth and rapid expansion in emerging economies, especially in Asia, will continue to stoke consumption from vehicles in the medium term. But passenger-car oil use is expected to peak around 2030, along with a slowdown in commercial vehicle oil demand growth. “There is a lot of talk about peak demand but this is far too early to be worrying about the demise of fossil fuels in the near term. Despite growth of EVs in double digits, overall sales amount to less than 2% of the total market,” said Chris Midgley, head of S&P Global Platts Analytics. “The current near-on 3 million EVs displaces less than around 60,000 b/d, or less than 0.06% of total global demand.”

Meanwhile, momentum is building around EVs and hybrid variants of the technology as viable alternatives to the future of mobility. Plug-in ranges are increasing and charging times are falling. Consumers are also becoming more concerned about emissions and the need to find alternatives to fossil fuels to meet their daily transport needs especially in urbanized areas. This has fed anxiety over the future of oil as the world’s primary source of transport fuel.

Professor Dieter Helm, an expert in transport and environmental issues at Oxford University and energy policy adviser to the British government, argues that advances in EV technology will eat into oil’s dominance as a transport fuel much sooner than the industry expects.

Digitization of public transport and traffic management along with infrastructure improvements could also be catalysts for faster change. However, Helm who recently published the book Burn Out: the endgame for fossil fuels has taken a more radical view on the future of oil.

“The impact on oil demand will build up in the next decade, potentially much faster than the International Energy Agency and the oil companies predict,” Helm told S&P Global Platts. “There will be tipping points where motorists switch to electric, once they are confident that the electric charging infrastructure is in place, and as the costs of the vehicles fall.” Although fuel demand for passenger transport could decline, demand could benefit in other areas such as petrochemicals and industrial consumption, which could both be boosted by EVs.

How Oil Companies are Responding to EVs

In reality, change will most likely be far slower than Helm would ideally like to see. Skeptics point out that while fast-charging stations are proliferating in parts of Europe such as the Netherlands, in many other European countries the vast majority of cars are more than 10 years old. Diesel remains a mainstay passenger car and haulage fuel, while the growth of EVs around the world is heavily incentivized by government subsidies and regulations.

Neither is the EV the only alternative to the domination of the ICE-powered car in mobility. Hydrogen especially in commercial transport and mass transportation could play an important role in the emerging energy mix as could natural gas. Fossil-fuel powered engines are also becoming more efficient, with manufacturers squeezing extra miles out of conventional valves and cylinders.

The most efficient petrol-driven cars are now capable of mileages close to 100 miles/gallon. According to BP the average car globally may have achieved less than 30 miles/gallon in 2015 but that is still more range efficient than the most expensive EVs. And engines are becoming more frugal. BP forecasts the average passenger car will achieve almost 50 miles/gallon by 2035. In its model, these efficiency gains could absorb most of the increases in the number of EVs expected on highways.

However, oil companies are still hedging their bets. Shell and Total have invested billions of dollars to expand liquefied natural gas (LNG) production, in part to feed expected increases in electricity demand, which could arise from EVs reaching a critical mass. Super majors — which have dominated highways and street corners with their refueling stations — are also investing to install recharging solutions into their networks. Electricity utilities are also looking for ways to tap the emerging market for recharging.

Instead of revolution the changes currently underway in the world of mobility appear more evolutionary, with oil set to continue playing an important role as a primary transport fuel source for decades to come.

Impact of EVs on Battery Metals and the Environment

Executive Summary

Fossil fuels have dominated transportation for the past century and are likely to continue to for the foreseeable future. However, new technologies and fuels, climate change policies and market drivers now threaten its dominance like never before.

Developments in batteries could make electric vehicles (EVs) cost competitive within a decade. Government policies and subsidies add to the pressure for change. Vehicle manufacturers are also investing tens of billions of dollars to prepare for a future that might see a growing share of EV sales.

Heavier duty vehicles, ranging from vans to long-distance trucks and buses, are also seeing a wider range of new cleaner fuel options. The transition is important for the downstream oil industry since both gasoline and diesel consumption may be threatened.

Electrification is not the only potential challenge for oil. Autonomous vehicles (AVs) could turn the world of transportation into a service industry with fewer cars on roads. Much higher utilization rates would have a wide ranging impact on fuel use, vehicle sales and even urban design. EVs are not necessarily the end game. Hydrogen could ultimately be better in terms of range and refueling, especially for heavy duty vehicles.

Europe is at the forefront of regulating the low-carbon transport revolution. The region’s policymakers are actively pushing manufacturers and consumers toward higher-efficiency loweremissions vehicles.

China’s market is the most dynamic in terms of low-carbon transport. By almost any measure, China currently leads the world in road transport electrification. Moreover, EV growth offers China an opportunity to re-write the established order in both domestic and foreign markets, potentially benefiting as a world leading EV exporter.

Change isn’t guaranteed. Refueling and range are concerns for consumers. The overall performance of EVs is well below ICEs. Currently, the lack of widespread recharging stations is a key constraint on the market. The infrastructure is being built, but there is much to be done to give consumers the comfort level provided by gasoline and diesel.

The recharging impact on the electric grid is another factor that will have to be monitored carefully. Network management of EV demand is a critical factor in the transition to alternative transport.

Costs for EVs and battery packs must come down to the point where there is no significant premium over car ownership. Niche buyers may pay more for perceived environmental benefits, but the industry must still provide clear value for wider penetration to take off. That is not yet the case for EVs.

Costs are coming down. Lithium ion battery pack costs have dropped to below $300/kWh today, from $1,000/ kWh in 2010. Expansive plans for additional battery manufacturing capacity should continue to drive the costs down, potentially toward $100/kWh, where it should achieve parity with ICE’s in markets with higher fuel prices.

EV demand is already proving disruptive for the metals industry, especially for lithium and cobalt prices. Sufficient minerals and metals exist in the earth’s crust to satisfy projected demand. However, more production and mine investment is essential to minimize the impact of what most analysts see as an impending supply deficit, and to keep prices steady, especially for lithium.

The oil industry has time to adapt. EVs first have to penetrate new car sales — currently less than 2% globally — and then slowly over time replace the entire fleet, which is 10 times the size of new car sales. This is a process that will occur over decades, not years. Despite EV growth, global road transportation demand for oil should continue to rise well beyond 2030. And even if conventional road transport turns negative in the future, there will be demand for petroleum for other uses such as petrochemicals, or air and marine transportation.

Large oil producers such as Saudi Arabia and OPEC are already adapting to the changing face of transport by investing in new technology and engaging with industry stakeholders. Major upstream projects are unlikely to be affected by growing EV penetration in the near term. Oil demand could also benefit from growing use of plastics and other petrochemicals products in the construction of lighter EVs.

EV developments may capture the headlines and the public’s imagination but the evidence suggests that even after a century of road domination the engine and fossil fuels both have a big role to play in the future of transport.

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