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Interview: OPEC's Barkindo sees no peak oil demand from EVs before 2040

London β€” OPEC Secretary General Mohammed Barkindo reveals how the group's 14 members are planning ahead for the challenge to oil coming from electric vehicles.

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Q: From OPEC's perspective how will members adapt to changes in mass-mobility such as the growth of electric vehicles (EVs) and hydrogen power units?

A: The road transportation sector currently accounts for 45% of global oil demand and the OPEC Secretariat constantly monitors developments in this sector.

This is highlighted by the fact that in OPEC's last two World Oil Outlooks (WOOs), for 2016 and 2017, alternative scenarios focusing on the road transportation sector were considered.

The OPEC Secretariat will continue to monitor this vital sector, through further engagement with technology firms in the sector, via our international dialogues with main consuming nations and regions, such as the European Union, China and India, as well as by closely following energy policy developments and contributing to the overall energy debate.

However, it is important to emphasize that oil is expected to remain the most important fuel in the global energy mix for decades to come. In the WOO 2017, published last November, there is no peak oil demand in the forecast period to 2040. Moreover, oil will remain the main fuel in the transportation sector, although we do recognize that EVs and other alternative transport means will contribute to a deceleration in oil demand growth, especially in the long-term.

Recognizing these trends, member countries are taking steps forward to diversify their economy and increasing non-oil revenues. Some examples are Saudi Arabia with its Vision 2030 plan, the rapid development of renewables in the UAE, and fuel price adjustments in several member countries primarily aiming to foster more efficient use of oil products.



Related blog post: How soon will electric vehicles make a significant dent in oil demand?

Q: Some experts argue that EVs and other forms of electrified transport spell the end of the oil era -- why would this not be the case?

A: Oil is a finite energy source, so one day we will see the end of the oil era. However, we do not see this happening anytime soon, and nor do any other major energy forecasters.

The OPEC Secretariat acknowledges that significant progress has been made in the development and promotion of EVs in recent years. Nonetheless, one should bear in mind that in 2016, EVs accounted for only 0.1% of the global passenger fleet. It is coming from a low base. However, in OPEC's WOO 2017, it is underscored that EVs will witness a further penetration of the passenger fleet market in the decades ahead. It is expected to account for around 16% of the market by 2040.

It is important to note that many uncertainties and constraints for EVs remain. The cost competitiveness of EVs is still questioned, particularly if generous subsidies are eliminated. In this regard, the cases of Estonia and Denmark where EV sales plunged significantly after governmental subsidies were slashed provide an interesting insight.

Moreover, the investment required to develop a reliable infrastructure for charging, as well as electricity generation, could also be seen as a constraint to further growth.

It is also quite revealing that in OPEC's WOO 2017 a much more optimistic EV penetration scenario was presented. Under this extreme, and what could be viewed as a highly unlikely scenario, EV sales would almost triple compared to the Reference Case so that EVs would represent over 25% of the passenger fleet by 2040.

However, even under this scenario, the resulting impact on oil demand would not be dramatic and there would still be no peak oil demand by 2040.

Furthermore, we should be reminded that in addition to the passenger car segment -- where the penetration of EVs is expected to be highest -- there is the commercial vehicles segment.

The WOO's projections indicate that oil demand growth in this segment of road transportation will be much stronger (compared to passenger cars) as sales are not anticipated to undergo electric diversification at anywhere near the level of passenger vehicles.

Moreover, significant future oil demand growth is also expected in petrochemicals, aviation, marine bunkers and other sectors, where options for shifting away from oil are not easy.

Q: How can OPEC work with the automotive industry to extend the lifespan of oil as a primary fuel source in the transportation energy mix?

A: As mentioned, the OPEC Secretariat is engaging with many technology firms in the transportation sector through various channels, such as institutionalized dialogues, technical exchanges, workshops and research and development fora. Many member countries will also have their own platforms for engagement with the automotive industry.

We also acknowledge the challenges of emissions that come from burning fossil fuels. In this regard, we recognize the need to use energy efficiently and to continually look to develop and adopt cleaner energy technologies.

We believe that solutions can be found in technologies that reduce and ultimately eliminate these emissions. We welcome further coordinated action with the industry, as well as and through various research and development platforms.

Q: Given the concerns over peak demand is the rapid growth of EV sales already being factored into OPEC's decisions over production levels and capacity?

A: As I have already mentioned, the OPEC Secretariat does not see peak oil demand before 2040, and that oil will remain the main fuel source in transportation.

In the road transportation sector alone, in the WOO 2017 an additional 5.4 million barrels a day (b/d) of demand is estimated up to 2040. This is mainly driven by the fact that the car fleet, both passenger and commercial, are forecast to double.

It is also important to consider that due to the relative low turnover rate of passenger vehicles, increasing EV sales will take a long time to be translated into a significant portion of the car fleet.

Moreover, and I do not hesitate to reiterate it again, significant demand growth is expected from other sectors such as petrochemicals and aviation, with an additional 3.9 million b/d and 2.9 million b/d, respectively between 2016 and 2040. In fact, oil demand is only anticipated to decline in the electricity generation sector during the WOO's forecast period to 2040.

Q: What is OPEC doing to be more engaged in the policy debate around alternative transportation technologies and not be perceived as a "dinosaur?"

A: As mentioned in a response to an earlier question, the OPEC Secretariat engages with many external parties, including technology firms, large consuming countries and regions, as well as through other institutionalized dialogues with other international organizations such as the International Energy Agency (IEA), the International Energy Forum (IEF) and the OECD. This includes comparing projections and scenarios, including on technology and transportation.

We also closely monitor transportation-related developments in the energy and oil market, organize regular workshops to exchange knowledge with experts on the subject, and provide considerable commentary on transportation issues in the WOO.

We are actively involved in the policy debate, as are our member countries, and we are always ready and willing to engage further.

Q: How is the growth in EVs and other changes to mobility such as hydrogen-powered shipping making it harder for OPEC Members to attract investment into their respective upstream and refining industries?

A: There is clear evidence that the oil industry has seen a drop off in investment in recent years, but we see little linkage between observed investment and potential changes in the transport sector.

The severe investment declines witnessed in both 2015 and 2016 were a result of the severe oil price cycle the industry was undergoing. Industry budgets were depleted and exploration and production spending was reduced by an enormous 27% in both years. In total, nearly $1 trillion in investments were frozen or discontinued, and many thousands of industry staff were cut from payrolls.

The unprecedented industry downturn led OPEC member countries, in cooperation with some non-OPEC producers, to embark on a concerted effort, through the historic "Declaration of Cooperation," to return balance to the market, help the return of a sustainable stability, which in turn should be supportive for the return of investments.

I should point out that OPEC member countries have continued to invest in their industries throughout this volatile down-cycle. This has positioned them well to maintain their leading roles as reliable suppliers to growing economies around the world.

Looking ahead, given our projected future demand for oil, with the recent WOO 2017 expecting demand to reach over 111 million b/d by 2040, an increase of almost 16 million b/d, the world simply cannot afford a future supply crunch. The industry needs to continue to ensure that conditions are supportive for a sufficient level of investment to be in place in the years and decades to come.

In addition, the estimated share of OPEC liquids in total global liquids supply is expected to increase to 46% by 2040, from 40% in 2016. I am confident that our member countries will continue investing in the future to provide the required volumes. We do not envisage any major issues in attracting investment.

Q: With the growing demand for electricity arising from these changes in transportation will OPEC be looking more at gas and renewables such as solar in terms of policy formation?

A: OPEC believes in a balanced energy mix. There will be the need for all energies in the years to come otherwise we would be unable to meet the growing demand for energy, especially in developing countries. Of course, we can expect to see a further shift towards renewables in the coming decades. Let me stress that OPEC is greatly supportive of the development of renewables. Many of our countries have vast sources of solar and wind, and significant investments are being made in these fields.

Nevertheless, as indicated in OPEC's WOO 2017, oil and gas together are still expected to provide more than half of the world's energy needs by 2040, with their combined share relatively stable between 52?53% over the entire forecast period.

Q: What is the future of oil and OPEC?

A: I have already answered in great detail about the future of oil. To put it simply, it will remain a core part of the overall energy mix in the coming decades.

In the industrialized world, we also need to remember how important oil and gas have been to our past. They have transformed our economies and our societies. They have provided heat, light and mobility. They have created and sustained economic growth and prosperity. The products derived from these precious natural resources are fundamental to our daily lives.

However, we should not forget that this has not been the story for everyone. When we start up our cars, switch on a light, turn on our mobile phones, we need to recognize that these everyday things are still unknown to billions of people across the world who continue to suffer from energy poverty.

These are people that need their voices heard. They need access to reliable, safe and secure modern energy services at scale. And oil will play a key part in helping deliver these essential modern energy services to all corners of the world.

As for OPEC, I think the last 18 months or so has shown that the organization is stronger, more committed and more purposeful than ever. The landmark agreements with our non-OPEC counterparts through the "Declaration of Cooperation" were an incredible challenge, a mammoth undertaking, but through a shared vision and a resolute strength of purpose we were able to achieve something that many thought was beyond us.

I have been very happy to say that the consequences of our historic cooperation have exceeded even the most optimistic of expectations. The market rebalancing process is well underway, supported by historically high levels of conformity by participating countries. But let me add that we have not taken our eye off the goal of bringing stocks down to their five-year average, and helping ensure that a sustainable stability returns to the market.

Moreover, we are also looking at ways and means to institutionalize the "Declaration of Cooperation" to ensure continuity in the framework and strategy that has built on this unparalleled global platform of stability. This would go beyond the short-term and look at some of the broader challenges, as well as opportunities, the oil industry is expected to face in the years and decades ahead.

We are positive about the future for OPEC and committed towards sustainable market stability with the broad participation of countries and major stakeholders.

(This interview has been edited and condensed for clarity.)

--Andrew Critchlow, andrew.critchlow@spglobal.com
--Herman Wang, herman.wang@spglobal.com
--Maurice Geller, maurice.geller@spglobal.com