Recent announcements from Volvo and France of plans to shift towards greater use of electric vehicles drove weaker returns in the energy space last week in spite of positive fundamental data. Bloomberg also weighed in on the topic with a New Energy Finance Report by ramping up their forecast for the adoption of electric vehicles.
Does this shift hurt oil and natural gas demand?
While we agree with the view that electric vehicles and clean energy sources, in general, will play a big part of global energy consumption going forward. We believe these announcements have created confusion on the impact of this trend in general on global oil demand.
Bloomberg’s report forecasts that electric vehicles will account for more than half of all new light-duty vehicle sales globally by 2040, up significantly from their 2016 forecast. They believe this would displace 8 million barrels per day of transport fuels by 2040 which is a big number, but should be put in context. Global oil demand is currently 95 million barrels per day and forecasted to grow to 110 million barrels per day by various independent agencies which also forecast the impact of electric vehicle adoption into the fleet. In other words, even with this more aggressive 8 million barrels per day forecast from Bloomberg, demand for oil is still expected to grow. On a related note, new electric vehicles will require more electric generation supporting our strong demand growth forecast for natural gas.
We think the Volvo announcement supporting a shift to electric vehicles merits clarification. They don’t plan to stop selling internal combustion engines in 2019, they plan to stop developing new models which only have combustion engines. In other words, all new models will have some element of engine electrification which includes hybrids and what are called “light hybrids”. These cars still rely on a traditional engine for primary power but get some assistance powering the motor from a battery, more in the case of hybrids, less in the case of light.
Finally, France announced a pledge to phase out all gasoline and diesel engines by 2040. To put that in perspective, France’s transportation fuel consumption currently makes up less than 1% of global oil demand so while the news has gotten a lot of attention it’s not a game changer in the electric vehicle story in our view.
Population and Economic Growth Part of the Equation
In summary, there is clearly a movement towards more electric vehicles on the road, but we think it’s helpful to put it into perspective as it relates to total demand and the need for energy infrastructure. We expect continued modest growth for oil, net of current transportation trends, based on population and economic growth and the development of emerging economies. As for as natural gas, we expect enormous growth, partially driven by these electric vehicles trend. More electric vehicles require more electric generation from a grid that is already phasing out coal and replacing with natural gas and renewables.
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