The Future of the Oil Industry in a World of Green Transportation

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As oil majors such as Shell and Total are starting to expand their holdings portfolios by investing in utility companies, the global oil demand is predicted to grow exponentially at least until 2030, according to different analysts of S&P Platts and BP.

In fact, despite the predictions of a boom in electrical vehicles and developments in the sustainable energy sector, global crude markets are evolving at an unprecedented pace, principally because of the growing demand of oil by China and other emerging markets, and thanks to the shale revolution in the United States, whose short cycle shale production helped to firstly stabilise, and then lower prices.

Changing Trends in Vehicle Use

Still, while oil consumption predictions look optimistic for the next twenty years at least, it should be taken into account that the main driver of demand in 2017 is the automotive sector, with passenger cars. Technological developments in batteries are making, and have the potential to make, electric vehicles (EVs) cost competitive within a decade, also thanks to government policies and subsidies that add incentives to change. Also, change in fashion trends in favor of smaller and less fuel-consuming cars can help the transition to EVs.

However, according to Chris Midgley, Head of Global analytics at S&P Platts, the major disruptor to the automotive industry, and, as a consequence, to the oil sector, especially in already developed economies, are the changing tastes of the younger generations, more concerned about environmental issues, and privileging the convenience derived from using ridesharing services such as Uber and Lyft.

The Role of Policymaking

As research by S&P Platts found out that regulations and laws restricting the emission threshold per vehicle provided major incentives for carmakers to produce efficient diesel engines and hybrid vehicles, it should also be noticed that there is a positive correlation between EV sales and subsidies or incentives in at least three countries across the world. In fact, as soon as incentives are discontinued, sales drop dramatically.

The Issue of Battery Costs

This phenomenon can be attributed to the high price of batteries, a fundamental component of electric vehicles, which can range between an additional €6,000-€16,000 to the cost of the electric vehicle, according to data from the European Automobile Manufacturers Association. In fact, to be competitive, the cost of 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.

Moreover, modern hybrid vehicles are becoming increasingly competitive not only in terms of cost, fuel consumption and refueling times but also considering the overall emissions level, including the manufacturing phase.

Still, EV demand is already proving disruptive, especially for the metals industry, with lithium and cobalt on the lead. However, according to S&P Platts analysts, more production and mine investment is essential to minimize the impact of what seems an impending supply deficit and to prevent price bubbles, especially for cobalt. Increases in lithium supplies, on the other hand, swamped forecast demand growth according to Morgan Stanley, meaning that EVs have to reach 31% of global car sales in 2025 to offset the surpluses.

For the oil industry, the introduction of EVs in the global automotive fleet hardly spells bad news, especially in the short term, despite the enormous disruption to the crude sector, and the impactful media coverage that sometimes distorts the vision of reality for the non-specialists in the sector.

In fact, EVs first have to penetrate new car sales, currently less than 2% globally, and then replace the entire fleet over time, which is ten times the size of new car sales according to S&P Platts analysts.

The Future

This process will take decades, thus giving the oil producers time to adapt, mostly by expanding their investment portfolio in sustainable energy sources, utilities, LNG extraction, and transportation, not to mention implementations to their already strong trading business.

Moreover, global road transportation is bound to increase, also thanks to economic developments in emerging markets, and to the low scrappage rates of the existing vehicle fleet, thus making the global demand for oil rise until 2030.

Also, once all light and medium vehicles will have the possibility to be fully electric, heavy-duty trucks and planes will need a battery pack light enough to match the range of a normal internal combustion engine (ICE) with a full gas tank, an extremely difficult task given the current state of R&D in the field of external battery technology, not to mention the charging times already criticised by current EV owners. In this case, fuel cells or drop-in fuels such as hydrogen or biofuels may be the answer, also for long distance vehicles, as costs drop.

Should conventional road transport turn conventional in the future, demand for petroleum and its derivatives will be led by petrochemicals, air, and marine transportation, thus ensuring a secure stream of revenues to be used eventually for research and development purposes.

Conclusion

Developments in EVs and sustainable energy projects may be capturing the headlines and the public’s imagination, but evidence suggests that after a century of reliance on combustion engines and fossil fuels, the transition will not be as easy and quick as it seems, especially in the field of road transportation.

With the latest evolutions of the transportation industry and of the energy supply sector, and consequently of the legal apparatus regulating the energy industry, oil producers, countries and corporations alike have already started to adapt to the changing landscape that will inevitably affect their core business.

Investments in new technologies and engagement with industry stakeholders are the main key to guaranteeing a successful transition from which all actors can benefit in a world of growing social acceptance of alternative mobility solutions. Nevertheless, in the long term, the potentials of growth for the oil sector are still substantial, also because of the growing use of plastics and composite petrochemicals used in the construction of electric vehicles.

 

CULLED FROM: Marketing Mogul

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