Sales of electric vehicles are growing faster than expected around the world and those of gasoline and diesel vehicles are declining. Yet the U.S. government still forecasts growing demand for oil and the oil industry is doubling down on production plans.
Why is this, and what will happen if US projections for oil demand growth are wrong?
I study sustainability and transformations in the global energy system. Let’s take a closer look at the changes taking place.
The giant leap of electric vehicles
On September 12, 2023, Fatih Birol, director of the International Energy Agency, an intergovernmental organization that advises the world’s major economies, attracted worldwide attention when he wrote in the Financial Times that the IEA now predicts a global peak in oil demand. , gas and coal by 2030.
This new date represents a significant leap forward from previous estimates that the peak would only be in the 2030s for oil and even later for gas. This also stood out because the IEA has generally been quite conservative in modeling changes in the global energy system.
Birol cited changes in energy policies and the faster-than-expected rise of clean technologies – including electric vehicles – as main reasons, as well as Europe’s shift away from fossil fuels in the context of Russia’s war in Ukraine. He wrote that the IEA’s upcoming World Energy Outlook “shows that the world is on the cusp of a historic turning point.”
VCG/VCG via Getty Images
The United Nations also published its “Global Stocktake” report in early September, assessing progress made around the world to achieve the goals of the Paris climate agreement to limit global warming to 1.5 degrees Celsius (2, 7 degrees Fahrenheit) compared to pre-industrial temperatures. The report reveals serious gaps in efforts to reduce greenhouse gas emissions to zero by mid-century. However, he noted two positives: The world is more or less on track when it comes to the growth of solar photovoltaics for renewable energy – and that of electric vehicles.
The dynamics of electric vehicle expansion are important because each vehicle that uses electricity instead of gasoline or diesel will reduce the demand for oil. Even as demand for petroleum products in other sectors, such as aviation and petrochemicals, continues to increase, the IEA expects road transport’s 50% share of consumption to fall of oil leads to an overall peak in demand within a few years.
Electric vehicles are now on track to dominate global car sales by 2030, with rapid growth in China in particular, according to analysts at the Rocky Mountain Institute. If countries continue to upgrade their electricity and charging infrastructure, “the endgame for a quarter of global oil demand will be in sight,” they write in a new report. As electric trucks become more common, oil demand will likely fall even faster, analysts write.
Global light vehicle sales already show a decline in sales of internal combustion vehicles – gasoline and diesel – mainly due to increased sales of electric vehicles, but also due to an overall decline in sales of vehicles that started even before the pandemic.
So why is the United States forecasting growth in oil demand?
Based on the data, it appears that global oil demand will peak relatively soon. Still, major oil companies say they plan to increase production, and the U.S. Energy Information Administration still projects that global demand for oil and fossil fuels will continue to grow.
Vehicles last longer today than they did two decades ago, and they’re also bigger, slowing efficiency gains. But the Energy Information Administration appears to be lowering its forecast for electric vehicle growth.
The Biden administration, which pushed through major U.S. tax incentives for purchasing electric vehicles, has taken steps to pave the way for increased oil and gas exploration. And large government subsidies continue to flow to fossil fuel industries in many countries. These contradictions undermine the goals of the Paris Agreement and could lead to costly stranded assets.
What do these trends mean for the oil industry?
It is fair to assume that large industries should have a good handle on future developments that may affect their fields. But they often have a competing priority: ensuring that short-term gains are preserved.
Electric utilities are one example. Most did not feel threatened by renewable electricity until its penetration grew rapidly in their territory. In response, some have pushed to delay any progress and invented false reasons to favor fossil fuels over renewable energy.
Certainly, some companies have modified their economic model to be part of the transition to renewable energies, but these still seem to be in the minority.
Large companies such as BP and TotalEnergies are investing in renewable energy, but these investments are often offset by equally large investments in the exploration of new fossil fuels.
Shell and BP have recently backtracked on previous climate commitments, despite tacit admissions that increasing oil production is incompatible with climate change mitigation. Exxon’s CEO said in June 2023 that his company aims to double its U.S. shale oil production over the next five years.
Daniel Leal/AFP via Getty Images
What is happening in the fossil fuel industry appears to be an example of the so-called “green paradox”, in which it is rational, from a profit maximization perspective, to extract these resources as quickly as possible. as quickly as possible in the face of the threat. threat of a future decline in market value.
That is, if a company can see that in the future its product will make less money or be threatened by environmental policies, it will be likely to sell as much of it as possible now. As part of this process, it might be quite willing to encourage the construction of fossil fuel infrastructure that clearly won’t be viable in a decade or two, creating so-called stranded assets.
In the long term, countries encouraged to borrow to make these investments could find themselves stuck with the bill, in addition to the resulting impacts of global climate change.
Extractive industries have been aware of climate change for decades. But rather than transforming into large-scale energy companies, most have doubled down on oil, coal and natural gas. More than two dozen US cities, counties and states are now suing fossil fuel companies for damages caused by climate change and accusing them of misleading the public, with California filing the latest suit on September 15, 2023.
The question is whether these companies will be able to successfully adapt to a world of renewable energy, or whether they will follow the path of American coal companies and only recognize their own decline when it is too late.
Sales of electric vehicles are growing faster than expected around the world and those of gasoline and diesel vehicles are declining. Yet the U.S. government still forecasts growing demand for oil and the oil industry is doubling down on production plans.
Why is this, and what will happen if US projections for oil demand growth are wrong?
I study sustainability and transformations in the global energy system. Let’s take a closer look at the changes taking place.
The giant leap of electric vehicles
On September 12, 2023, Fatih Birol, director of the International Energy Agency, an intergovernmental organization that advises the world’s major economies, attracted worldwide attention when he wrote in the Financial Times that the IEA now predicts a global peak in oil demand. , gas and coal by 2030.
This new date represents a significant leap forward from previous estimates that the peak would only be in the 2030s for oil and even later for gas. This also stood out because the IEA has generally been quite conservative in modeling changes in the global energy system.
Birol cited changes in energy policies and the faster-than-expected rise of clean technologies – including electric vehicles – as main reasons, as well as Europe’s shift away from fossil fuels in the context of Russia’s war in Ukraine. He wrote that the IEA’s upcoming World Energy Outlook “shows that the world is on the cusp of a historic turning point.”
VCG/VCG via Getty Images
The United Nations also published its “Global Stocktake” report in early September, assessing progress made around the world to achieve the goals of the Paris climate agreement to limit global warming to 1.5 degrees Celsius (2, 7 degrees Fahrenheit) compared to pre-industrial temperatures. The report reveals serious gaps in efforts to reduce greenhouse gas emissions to zero by mid-century. However, he noted two positives: The world is more or less on track when it comes to the growth of solar photovoltaics for renewable energy – and that of electric vehicles.
The dynamics of electric vehicle expansion are important because each vehicle that uses electricity instead of gasoline or diesel will reduce the demand for oil. Even as demand for petroleum products in other sectors, such as aviation and petrochemicals, continues to increase, the IEA expects road transport’s 50% share of consumption to fall of oil leads to an overall peak in demand within a few years.
Electric vehicles are now on track to dominate global car sales by 2030, with rapid growth in China in particular, according to analysts at the Rocky Mountain Institute. If countries continue to upgrade their electricity and charging infrastructure, “the endgame for a quarter of global oil demand will be in sight,” they write in a new report. As electric trucks become more common, oil demand will likely fall even faster, analysts write.
Global light vehicle sales already show a decline in sales of internal combustion vehicles – gasoline and diesel – mainly due to increased sales of electric vehicles, but also due to an overall decline in sales of vehicles that started even before the pandemic.
So why is the United States forecasting growth in oil demand?
Based on the data, it appears that global oil demand will peak relatively soon. Still, major oil companies say they plan to increase production, and the U.S. Energy Information Administration still projects that global demand for oil and fossil fuels will continue to grow.
Vehicles last longer today than they did two decades ago, and they’re also bigger, slowing efficiency gains. But the Energy Information Administration appears to be lowering its forecast for electric vehicle growth.
The Biden administration, which pushed through major U.S. tax incentives for purchasing electric vehicles, has taken steps to pave the way for increased oil and gas exploration. And large government subsidies continue to flow to fossil fuel industries in many countries. These contradictions undermine the goals of the Paris Agreement and could lead to costly stranded assets.
What do these trends mean for the oil industry?
It is fair to assume that large industries should have a good handle on future developments that may affect their fields. But they often have a competing priority: ensuring that short-term gains are preserved.
Electric utilities are one example. Most did not feel threatened by renewable electricity until its penetration grew rapidly in their territory. In response, some have pushed to delay any progress and invented false reasons to favor fossil fuels over renewable energy.
Certainly, some companies have modified their economic model to be part of the transition to renewable energies, but these still seem to be in the minority.
Large companies such as BP and TotalEnergies are investing in renewable energy, but these investments are often offset by equally large investments in the exploration of new fossil fuels.
Shell and BP have recently backtracked on previous climate commitments, despite tacit admissions that increasing oil production is incompatible with climate change mitigation. Exxon’s CEO said in June 2023 that his company aims to double its U.S. shale oil production over the next five years.
Daniel Leal/AFP via Getty Images
What is happening in the fossil fuel industry appears to be an example of the so-called “green paradox”, in which it is rational, from a profit maximization perspective, to extract these resources as quickly as possible. as quickly as possible in the face of the threat. threat of a future decline in market value.
That is, if a company can see that in the future its product will make less money or be threatened by environmental policies, it will be likely to sell as much of it as possible now. As part of this process, it might be quite willing to encourage the construction of fossil fuel infrastructure that clearly won’t be viable in a decade or two, creating so-called stranded assets.
In the long term, countries encouraged to borrow to make these investments could find themselves stuck with the bill, in addition to the resulting impacts of global climate change.
Extractive industries have been aware of climate change for decades. But rather than transforming into large-scale energy companies, most have doubled down on oil, coal and natural gas. More than two dozen US cities, counties and states are now suing fossil fuel companies for damages caused by climate change and accusing them of misleading the public, with California filing the latest suit on September 15, 2023.
The question is whether these companies will be able to successfully adapt to a world of renewable energy, or whether they will follow the path of American coal companies and only recognize their own decline when it is too late.
