Over the next decade, we see downside to oil demand as a limited risk because each 1 million EVs (roughly equal to 2017 EV sales) only replace about 20,000 barrels/d and oil demand growth should continue on the back of growth from commercial transport and chemicals, with demand growth over the next three to five years.
Longer term (beyond 2030), although both the rate of change and scenarios are less certain, the shift of light vehicle transport to EVs is more critical and could contribute to declining demand for oil products. The long lead time until EVs take over should allow the major oil companies to look for alternative growth routes, with more focus on gas and renewables. These two energy sources are well placed to meet some of the increased demand for electricity from power producers as a result of EVs. Gas makes up about half of the reserves and production of the fve super major oil companies.
For oil producers, growth in demand from emerging markets for transport remains the larger factor in the near term, whereas 47% of crude oil is currently used in road transportation. About 1.2 million EVs (including lighter trucks, source: EV-volumes.com) were sold in 2017 compared with total global car sales of between 93 million and 95 million. Platt's Analytics has pointed to an oil demand loss of 20,000 barrels per day (bbls/d) for each additional million EVs. Even if assuming EV sales multiplied to 10 million-15 million in 2025, it would imply an initial impact of a 200,000-300,000/d decline in oil demand, compared with current production of about 95 million bbls/d. Over the longer term (after 2030), as EV market share translates into higher EV stock levels, the cumulative impact of the shift to EVs and heavier trucks could result in downside to global oil demand, outweighing the continued growth projected from commercial transport and chemicals.
We see oil-focused producers with reserves at the high end of the cost curve as most exposed. While producers have focused on shorter cycle developments, including shale, in recent years of low prices, the investment profle is also important. A high cost development could still be economically attractive, if the costs are front loaded and the long-term investment needs to maintain production are low. As with existing, producing developments, even if oil prices are low, the capital cost is largely sunk. As demand and potential returns wane and companies pull back on investment, free cash fow generation could actually increase. Such a lack of reinvestment can't ultimately support a sustainable business model, however.
Oil refneries also face a potentially painful transition over time as demand for their oil products softens and declines and also as the mix of products changes over time. Many refineries can only make relatively modest changes to their product slate. Changing their confgurations, to produce, at frst, less gasoline, then also likely less diesel, even where possible could involve material investment, which might not be economic. We note that, over time, the age of many Organization for Economic Cooperation and Development refineries could result in capacity closures that offset some demand weakness. For refiners, as well as producers, the rate at which these different dynamics evolve will be critical.