Oil Market 2030 / An Analysis
A visit to the Bay Area or Norway and observing that the next car zipping by is an Electric Vehicle (EV) may make you awe but beneath this quiet moment is a hidden spark to a revolution across Industries, Economies and Politics.
In this blog we study only the economic impact which is estimated to be in the magnitude of $1 trillion on a direct hit and and effectively about $4–5 trillion for the global economy.
I present my analysis in Excel Spreadsheets. You are free to change values and observe the effects. So lets jump into the analysis.
The future demand reduction naturally will lead to price war amongst the oil producers. The supply cannot be abruptly cut so it will effect the price. Further, varying dependence of different countries on oil exports make certain supplies inflexible hence causing inflexibility of supply. The impact of certain capacities turning redundant due to low prices will be marginal. The price is expected to stabilise at $50–$55 per bbl by 2030 allowing normal profits. This price is based on annual inflation in the operating cost by 1.5%. It corresponds to today’s Brent crude rate @ 42.50 to $46.70 per barrel.
Let’s explore the sector wise oil demand. These figures are gathered from public datasets and public statistics.
Major Sector wise oil Demand — Present and for 2030
Road transport sector, the major oil consumer, is set to gradually shed its oil demand reaching from today’s 48 million bbl/day to a bottom of 17 million bbl/day from the otherwise projection of 65 million bbl/day by 2030.
EV tech i.e. the battery replacing fuel tanks will also affect oil demand from other sectors viz. agriculture and defence. About 2,000,000 tractors are globally manufactured annually. Tractors, agricultural machinery and processing facilities will sure see drop in diesel demand by a minimum 15% on conservative basis.
Though defence is slow in adopting changes, cost saving needs will force it to adopt to EVs at least for non-combat operations.
Oil demand for home heating and other uses will stand reduced when energy can be stored to last longer periods. However, share of this demand is low @ 4% and the percentage may remain same for 2030.
Industrial demand arises mainly from use of furnace oil and in the form of demand for plastics. I do not have detailed data of its consumption pattern. I assumed the oil demand reduction at 15%. It will be account of curtailed plastic usage and furnace oil replaced by electric power. Lubricant demand is also expected to fall with more EVs or road.
The overall impact works out to a reduction in demand by 38% working out to 64.70 million bbl/day as against demand if without EVs projected at 104.89 million bbl/day by 2030. Compare this with the present oil production of 98 million bbl/day.
Additional Reduction in Oil demand
Battery related technological advances and miniaturisation of safe nuclear power generators will see additional savings in oil consumption. Considering uncertainty in commercial success of these techs, the potential savings are not considered in arriving at the future oil demand. However, a glimpse of the potential savings gives an idea of its impact on oil demand.
This factor will play a major role in the decisions for investment in creating long term additional oil production and refinery capacities.
Oil Rates impact on GDP of Different Oil Producing Countries
There are 17 major net oil exporting countries. Their economic dependence on oil revenue differs from country to country. Higher the percentage, more the inflexibility in responding to low oil prices by production cut.
Canada and Mexico are the only two countries with negligible share at 5% and 4%, respectively.
As against this, oil revenue share to GDP for Kuwait, Iraq and Libya exceed 70% making them most venerable to oil revenue and hence, just cannot afford to lose the revenue forcing to pump more oil. The rest 12 countries the percentage varies from 19% to 50%. It means that dependence on oil export revenue is material for their economies.
The shortfall is normally attempted to be bridged by:
- Cut in planned expenditure — first casualty being the social programs
- Liquidation of sovereign investments
- Sovereign borrowings
- Development of non-oil revenue sources, mainly being foreign exchange earning commerce and industry
The revenue shortfall first affects the social programs. Its effect on a countries’ internal politics and social unrest that may pose a danger to the rulers or the Governments. This, in turn, may force more expenses on internal security. A paradox!
Sovereign investment consists of investment in gold, US and Euro bonds and stocks. Its liquidation or even the market expectation of the likely liquidation pulls down the market. The liquidation added with drying up the funds may cause mayhem on the stock markets all over the world. Stock market boost by EV and its ancillary industries will cushion the fall to some extent. However, the investor constitution will change from Petrodollar holders to mutual funds . Global market capitalisation is estimated at $75 trillion. A 5% drop in it mean writing off $3.75 trillion!
Government borrowings have already commenced. Saudi Arabia had to issue bonds to bridge the gap to ensure funding of its ongoing infrastructural projects and social programs. Not all the countries can enjoy the comfort of the borrowings. Unstable economies and political scenarios will either restrict the limits or make the borrowing costly. Again a paradox!
Development of non-oil revenues needs a long term approach. The time may be out for the countries those have not already initiated the process. UAE is the best example showcasing success of the initiative. Saudi Arabia already initiated many projects including huge solar energy projects. The scope, however, is not large considering the overbearing Chinese and Indian industry. Absence of technological base and skilled manpower is another impediment. Further, such countries are unlikely to match the low production costs presently offered.
In a nutshell, there seem hardly any solution for most of the net oil exporting countries to retain the economic status presently enjoyed. Providing gainful employment to the growing population is going to be difficult for these countries. Extrapolating social and political impact of the same is scary.
Present Oil Exports by Net Oil Exporting Countries
Aggregate oil exports by net oil exporting countries is 49 m bbl/day. Impact of oil demand reduction will be severe for them. As you can see from the table below almost all countries oil exports range between 36% to 96% of their oil production. This means that oil industry is set for upheaval. It will affect additional investment in the sector. Its’ effect on the ancillary industries engaged in supplying capital goods, maintenance and consumables is a separate topic for discussion. It will correspondingly affect the developed countries.
Capacity Reduction
Low oil prices will force a few capacities to be shut as the operations will become nonviable. Considering the present production and delivery logistics costs adjusted for inflationary cost escalations for 2030, the expected capacities aggregating to 23.56 m bbl/day can be expected to become redundant.
This capacity reduction will help stabilise oil prices to an extent as the over supplies to that extent will be curtailed.
Major Oil Importers
Major oil importing countries as you can see from the table above, are all developed and major economies. They together constitute 90% of the global imports. Most of them are energy dependent. EV Technology is mainly developed in these countries with a desire to reduce their oil import dependence. Ecological considerations boost the efforts further. Putting these considerations together, EV revolution will have maximum footprint in these countries. India may be an exception as it may be its conscious policy to delay investment in EV technology and capacity creations at this stage with a view to take advantage of the impending low fuel prices or rather resource constraints to offer subsidies for EVs. Such policy may see the auto majors dumping their fuel cars in countries like India.
Major savings in oil consumption by 2030 is estimated at 48 m bbl/day. It will be mostly achieved by these countries. Major player is China. Its oil import dependency may become marginal. It already has about 390.000 electric buses and trucks plying on Chinese roads.
EV and the battery manufacturing capacities are expected to be controlled by a few these countries. Oil exporting countries have missed the bus hoping for oil demand to continue to grow. None of the major oil exporting countries have invested in EV technologies and capacity creations. Even Russia seem to have shown lukewarm interest in EVs. Even sovereign funds of major oil exporters have not invested in EV projects of other companies. The attempts to put down EVs have only backfired.
Savings in Future Oil Consumption — Road Transport
EV are in effect to replace fuel vehicles. This factor is most contributing to reduction in the global oil demand. Road transport constitutes 54% of the total oil consumption. Any reduction in this demand directly affects the oil market. Even economic slow down feared as a result of the US-China trade war has shown to have significant impact on oil prices. Permanent replacement of fuel guzzling commercial vehicles by EV semis and buses and trucks is bound to hurt the oil demand.
Based on certain assumptions explained below, the global demand from the commercial transport vehicles and cars is estimated to wipe out 48 m bbl/day oil consumption by 2030. This is after considering normal sectorial growth. Its impact in terms of year wise bbl/day savings and impact on the overall net oil demand is worked out in the table below.
The working is based on the operating and consumption norms assumed as provided in the table below.
You need to appreciate that EVs will be the first preference to be on roads. Assume a family has two cars. The car used more will be the EV. Their fuel car will be more or less a spare car used only on occasions. In other words, KMs run by EVs will far exceed than the fuel car. The same consideration applies for commercial vehicles.
EV Revolution
EV revolution is subject to certain technological developments. Minimising battery charging time and more dense energy storage and per kWh battery cost reduction are critical for the revolution. Once the capital costs are at par with the fuel vehicles, the demand is expected to spiral. Ecological levies on fossil fuel consumption will boost the market further. The analysis is based on assumption of success of these technologies.
The basic condition for success of EVs is its capital cost becoming at par with fuel vehicles. Government subsidies can best be taken as an initial incentive. It cannot continue forever. No government can afford it. Funding the EV subsidies by taxing fuel vehicles also has limits. EV industry has neared the comparable capital cost objective. Cost of EV batteries is falling and has already reached $100 per kW. It expected to fall further. Workings for EV cars is shown in the table below. You will find that the objective is almost achieved. The table below shows expected cost of EV cars. You can see its cost can be almost at par with that of fuel cars. The cost structure will safeguard the Govt. tax revenue and will do away with any need for EV subsidies. The operating cost or monthly outgoes covering the energy cost, EMI and maintenance cost works out in favour of EVs.
The speed of replacement of fuel vehicles by EVs will be evidenced by ‘S’ curve demand. It means that the next 10–12 years will experience spiralling demand for EVs eventually stabilising to service the normal growth in its demand and meeting the replacement needs.
An important another consideration here is that the EVs are expected to put on road maximum considering its low fuel and maintenance cost. It will be more true for the commercial vehicles. Fleet of fuel vehicles then will function as feeders. An issue of surplus fuel vehicles is going to be a burning issue. The investment cannot be written off so easily. It will in turn slow down demand for EVs. This issue, however, over the next 11–12 years become blunt as the existing vehicles, though expected to ply for 15–17 years will become un-affordable on account of the increasing maintenance cost and can be replaced. An option of converting fuel vehicles to EVs will also ease the problem to some extent.
The existing fuel vehicles manufacturing facilities can be converted into EV plant with marginal additional investment. It may not pose a serious issue to fund this investment. Battery capacities are rapidly increasing with many giga capacity battery plants being established in Europe, US and China.
EV Growth and Fuel Savings for Different Class of Vehicles
Year wise increase in EV sales with the resultant reduction in oil demand for the period from 2019 to 2030 is shown the tables below. Last column of each of the tables shows the expected EV sales in billion Dollars. The aggregate global EV sales are expected to reach $600 billion a year.
The projection may look too optimistic. But then when you look at ‘S’ demand experienced by many home appliances in the past, the expectation of the same happening to EVs is not misplaced. The demand will far outpace the manufacturing capacities for the initial 3–4 years. You can imagine compulsion of commercial fleet operators to shift to EVs to remain competitive.
This is humble effort to work out the possible impact of EVs on the global oil demand. I look forward to comments and contributions from the viewers. You may replace the figures in the spread sheets.
