Electric cars put pressure on oil demand
David Sheppard, the FT's deputy commodities editor, discusses possible scenarios for global demand of electric cars and what impact this might have on the future of oil prices.
Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.
China and India have both indicated that they might follow the UK and France by phasing out the production and sale of fossil-fueled vehicles. But how will that affect future oil demand? Well, our energy markets editor, David Sheppard, joins me now. David, we've known for a while that electric cars and their production around the world will impact future oil demand. But have China and India just raised the threat level there?
Well, certainly. When you've got two of the world's largest, population-wise, economies, but also some of the fastest-growing-- together, China and India make up a third of the world's population-- rapidly industrialising, they are going to play a huge role in future oil demand, and also future car growth. So if you've got those countries saying, we're looking at the possible phase out of fossil fuel vehicles in time, yes, that's going to have a huge impact on oil demand, if it comes to pass.
That's the big question at the moment. But it is starting to be taken seriously by the oil industry. Some of the world's biggest consultants, who even a year ago may not have dismissed this out of hand, but wouldn't have had it as a core scenario, are now starting to say, look, we need to start planning for this. We need to look at this as a real possibility. It may not be our core scenario, but it has a real likelihood of higher electric vehicle adoption, lower use of fossil fuels, and what that means for the world's oil industry.
We've got a chart that really sort of highlights those two different scenarios, haven't we? So the red line here is showing us, you know, as things are. And the blue line showing us what could happen.
Well, this comes from PIRA Energy, an oil consultancy owned by S&P Global. They're basically saying that the reference case or their core scenario still remains that oil demand will continue to rise all the way up to 2040, getting from just under 100 million barrels a day to around 125 million before it plateaus. What they're saying now though is, with China and India both talking about the possibility of this, they've had to bring in this higher electric vehicle adoption scenario which says that oil demand could be as much as, say, 10 to 15 million barrels a day lower in this scenario.
Now, that's a huge amount. Might only be 10% or so, but the oil market tends to pivot on 1% to 2% moves in supply and demand. That can take the price from $100, as we saw in the early years of this decade, down to $30 or $40, as we've seen more recently. So to say it could have as much of an impact as 10 million barrels a day is huge for the oil industry.
And is the blue line, though, realistic in terms of timetable? I mean, China is saying it wants to get rid of diesel and petrol cars by 2040, and India by 2030. Is that realistic?
It's difficult, certainly. I mean, I think that's one of the reasons they're not putting it as a core scenario yet. And we need to be clear, this is not yet the law of the land. They're saying it's something they're looking at as a possibility. You know, UK and France have already said this, though. Two major Western economies are saying we want to phase out fossil fuels by that same kind of period.
So if India and China follow through, in some ways, they have a huge advantage, partly because they're emerging-- you know, fast developing economies. And China obviously has a much greater degree of a command economy. So if they say we want to see this, A, their own domestic manufacturers will have to respond in some way. But also, for the Western car manufacturers who are looking at these two huge populations who are getting more and more wealthy as time goes on, they're thinking, these guys are the future of car demand growth. As a result, if China or India is going to push towards getting rid of fossil fuels in car engines, Western manufacturers are going to have to respond as well.
If this all does happen around 2030, 2040, as the blue line suggests, how quickly could we see peak oil demand?
Any long term forecast of this kind in the oil industry is very difficult to pin it down to a year. But they're talking, you know, certainly earlier than it would otherwise be. A lot of people, like the International Energy Agency, for example-- advises all industrialised countries on energy policy. They are saying, look, you can't just look at vehicle demand and think electric cars, that's it. You've got petrochemicals. You get jet fuel. You've got trucks, et cetera. All make up a huge proportion of global oil demand. And those things are expected to keep rising as emerging markets grow.
However, if you take out this huge chunk of vehicle demand from China and India, then at that point, you start to see things plateauing. Some oil companies, such as Royal Dutch Shell, have already said that they see oil demand peaking in the next decade or two. Others are more circumspect. Saudi Arabia, for example, says no. Obviously, it has a vested interest, but that's where they are. Exxon Mobil though, as well, also say no, we do not see oil demand peaking because of emerging market growth.
David Sheppard, thanks very much.