Oil Majors Worried About Drop in Crude Demand Due to EVs

David Fessler By David Fessler
Energy and Infrastructure Strategist

Oil & Gas

Nearly a decade ago, I started talking about the concept of peak oil. Simply put, this theory states that global oil production will hit a maximum (peak) level before declining.

When oil prices hit a record $147 a barrel in July 2008, many analysts believed we had reached an all-time high. Back then, peak oil was all about peak supply.

However, the introduction of hydraulic fracking and horizontal drilling blew the peak oil argument right out of the water. In fact, so much new supply has been developed over the last decade, the U.S. is now the world’s top oil producer.

We will reach peak oil, but not because of supply. This time, it will mean something entirely different.

I’m talking about peak oil demand.

And it has a lot to do with electric vehicles.

The Impact of Electric

The EV market is close to its tipping point this year. When that happens, EVs will quickly become the primary type of vehicles sold at car dealerships around the world. (That’s already the case in Norway, where every second car sold is an EV.)

With the introduction of more and more EVs, we’ll slowly start to see a reduction in the demand for gasoline and diesel.

And that means a reduction in the demand for crude, which will have far-reaching ramifications for the oil industry as a whole.

In BP’s latest Energy Outlook, the oil giant predicts crude demand slowing and then plateauing in the late 2030s. It also expects global passenger vehicles to double to 2 billion by 2040.

That fleet would include more than 320 million EVs. That’s a hundredfold increase over today’s EV numbers.

But that’s only part of the story. By 2040, autonomous vehicles are expected to be widespread.

And most of them will be EVs. That’s because EVs have much lower maintenance costs than those of internal combustion engine vehicles.

Today, EVs are racking up only about 2% of all passenger vehicle miles. But fast-forward to 2040, when self-driving cars will be more common and autonomous EVs could account for at least 30% of passenger miles.

Peak Oil on the Horizon

BP anticipates oil production will peak around 18.7 million barrels per day and will finally start declining by the end of the next decade.

But I think it’s going to peak lower and decline sooner… as soon as 2025.

After all, I’m a strong believer that technological change always happens much faster than anyone thinks it will.

All you have to do is look at how rapidly cellphones have become widespread. It took a decade or less for half the world’s population to have one in their pocket. Why would the adoption of EVs take any longer?

I think half the vehicles on our highways could be EVs by 2040. That will bring down crude demand much faster than what the current projections say.

Some oil executives are kidding themselves. Most notably, Saudi Aramco CEO Amin Nasser doesn’t see EVs as a threat for at least several decades.

Other big players, like Shell or Total, seem to be getting the message. They’re increasingly focused on natural gas and moving away from oil.

The exact date of the new peak oil isn’t easy to predict. The important thing is that it’s coming.

Major oil companies and their shareholders need to buy into the idea. Otherwise, they could face big losses down the road.

That’s my opinion. What do you think? Comment below.

Good investing,

Dave