Download What happened to peak oil?

April 2017 Long-Term Thinking - Energy
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F U N D A M E N TA L S
What happened to peak oil?
Peak oil demand is a contentious topic. It is crucial for climate change, yet there are
possible negative downsides such as volatile oil equity prices and corporate bond
defaults. It could even undermine the growth of entire countries.
It is remarkable how quickly and
dramatically
can
market
change.
Figure 1 – Oil demand by end use
narratives
Well-established,
Power - 5%
widely-held beliefs end up being
dismissed by the same market
Other - 11%
participants who had been their
Other transport - 15%
biggest advocates. Peak oil – the
view that the world would soon
Industrial - 28%
pass the peak in oil production,
thereafter entering terminal decline
- was one such belief. Today, it is
Trucks and SUVs - 24%
very difficult to find mainstream
market participants who still hold
Cars - 20%
this view.
Peak oil is still with us though –
only now it is the belief that oil
Source: LGIM analysis, BP
demand is about to peak. While
the consequences of peak supply
Moreover, should excess supply
are going to focus on the dominant
could have been disastrous for
lead to price falls, the oil sector’s
use of oil today, transportation.
economic activity, some aspects
equity and bond prices could come
Somewhere between 25% and 30%
of peak demand could be positive
under pressure. In 2015 and 2016,
of all oil demand is attributed to cars
as
companies
falling oil prices led to corporate
and SUVs as captured in Figure 1.
improve efficiency and switch to
consumers
and
bond defaults spiking higher and
Our analysis suggests that at some
cleaner energy sources.
some
point in the future we believe it is
oil-producing
countries
slipping into recession.
highly likely that passenger vehicle
A steady increase in oil demand has
oil demand is going to peak. That
been very important in supporting
FOCUS ON TRANSPORTATION
said, we think there are good reasons
strong capital expenditure from oil
Oil demand is a complex topic,
to suggest this will not happen in
companies, even during economic
encompassing
the coming five to ten years.
downturns. Each year, companies
economic
have been confident that demand is
development
going to be a bit higher, and ‘legacy’
policy. Each could influence whether
supply (all else equal) is going to be
oil demand is set to peak in the
a bit lower. But if oil demand peaks,
coming years, and we will return to
companies will be less inclined
them in future research. However,
to maintain levels of investment.
for the purposes of this analysis we
factors
growth,
and
such
as
technology
government
April 2017 Long-Term Thinking - Energy
FUEL EFFICIENCY OUTWEIGHING
Figure 2 – A balancing act of demand dynamics
ELECTRIC CAR ADOPTION
Focusing on passenger vehicles,
and assuming that miles driven
per car is constant, analysing the
Fuel efficiency gains
amount of oil used for passenger
Electric vehicle adoption
vehicles can be largely reduced to
Number of vehicles
three factors: fuel efficiency gains,
electric vehicle adoption and total
vehicle growth (Figure 2).
Demand
shrinks
The prevailing argument from the
new generation of advocates for
Demand
grows
peak oil is that the rapid adoption
of electric vehicles, along with a
Source: LGIM
drive to improve fuel efficiency, will
result in a reduction in oil demand.
Figure 3 – Continued US appetite for pickup trucks
As
with
any
new
technology,
estimating the impact of electric
US new vehicle sales mix
challenging.
65%
This is especially the case given
60%
that government intervention can
55%
vehicle
adoption
is
be a factor in accelerating the
adoption of electric cars.
We are
therefore cautious when predicting
50%
45%
the implications for oil demand.
40%
However, in relative terms, the impact
35%
of
30%
fuel
efficiency
improvement
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
is generally thought to outweigh
electric car adoption. One forecaster
% Cars
% Lt trucks
estimates that fuel efficiency gains
will have twenty times more impact
Source: LGIM Analysis, Bloomberg
on oil demand than that of electric
vehicle adoption. Other forecasts
This would be a positive outcome
Reason 1: Consumers still desire
may be less extreme, but they
for the environment, with carbon
inefficient vehicles
broadly agree that fuel efficiency is
emissions from passenger vehicles
Whilst it is impossible to prove,
far more important.
being
contributor
consumer data suggests that buying
towards climate change. However,
a fuel efficient car is driven by
it is likely that shifting from coal
affordability concerns, rather than
that fuel efficiency will make a
to
power
a decision based on the technology.
meaningful dent in oil demand
generation is going to be a much
The US consumer is demonstrating
growth. For example, BP estimates
more important force in this battle,
a seemingly insatiable appetite for
that of the 23 million barrels
far more than simply just replacing
pickup trucks as shown in Figure 3,
per day of demand growth that
old diesel vehicles.
which is creating a meaningful drag
The
they
same
believe
forecasters
would
predict
a
gas
substantial
(or
renewable)
otherwise
on average fuel efficiency.
occur between now and 2035,
In
17 million barrels per day will be
such
offset by gains in fuel efficiency.
predictions will be realised, for two
any
case,
optimistic
we
doubt
fuel
that
efficiency
main reasons.
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April 2017 Long-Term Thinking - Energy
Furthermore, Figure 4 demonstrates
how the average vehicle sold in the
US stopped being more efficient
Figure 4 – US consumers have a preference for inefficient vehicles
$150
as the oil price started to decline,
suggesting that US consumers
have an underlying preference for
large and fuel inefficient vehicles,
28
There has been no improvement in fuel efficiency in the US from late 2014
we are already substantially behind assumed improvements
at almost exactly the same time
27
$130
26
$110
25
$90
24
but will only buy them when they
are affordable.
23
$70
22
Figure 4 also demonstrates that
the US is falling materially behind
their fuel efficiency targets (CAFE1).
$50
$30
01/10/2007
40%
30%
that US average fuel efficiency will
25%
onwards.
SUV Share as a % of total vehicle sales in China
20%
15%
We note a preference for inefficient
10%
vehicles in other parts of the world
5%
too. The data quality is less strong
0%
elsewhere, but in China we estimate
2011
that at least one in three new cars
is a “light truck” (i.e. an SUV),
Actual / assumed vs. CAFE STANDARDS (RHS)
35%
efficiency standards. We forecast
resume its trend growth from 2018
01/06/2016
Figure 5 – SUV share of total passenger vehicle sales
to meet fuel efficiency targets we
relaxation of both emissions and
01/04/2014
Source: LGIM Analysis, Bernstein, University of Michigan, Bloomberg
be met. In tandem with the failure
been lobbying aggressively for a
01/02/2012
Monthly recorded effeciency of additions to the US fleet (RHS)
mandated by global regulators as
also note that US automakers have
20
01/12/2009
Brent Oil Price (LHS)
Our view is that the efficiency gains
shown in Figure 4 are unlikely to
21
2012
2013
2014
2015
2016
SUV Share
Source: LGIM Analysis, Bernstein
and that this is likely to rise with
disposable incomes (Figure 5). We
Small diesel cars are very efficient,
to decline. We assume that diesel
expect, therefore, that Chinese fuel
with new generations reporting
declines to 25% of new vehicle
efficiency improvements are only in
fuel efficiency figures of 90 miles
sales by 2025, from the c.50% of
line with historical trends of about
per gallon or more. However, we
sales it represents today.
3% a year, rather than the much
now know that emissions from
more aggressive target of 6%.
these cars are not nearly as clean
OECD* PASSENGER VEHICLE OIL
as we had been led to believe. To
DEMAND COULD BE SIGNIFICANTLY
Reason 2: Fuel efficiency credibility
help counter these emissions, a
ABOVE CONSENSUS
in jeopardy
number of European cities have
Holding all other things constant,
What about Europe? Europe has by
announced plans to ban diesel
we estimate that by 2025 oil demand
far the most fuel efficient car fleet in
cars and vans from their centres by
from passenger vehicles may be
the world, with more fuel efficient
2025. Rather than diesel continuing
anywhere from 1.2 million to 1.7
diesel-powered cars, and much
to grow market share – as required
million barrels per day higher than
smaller and lighter vehicles. Again,
to meet official efficiency targets –
consensus expectations. Given that
we believe this is largely driven by
we therefore think it is more likely
expectations for annual demand
affordability.
1. The Corporate Average Fuel Economy (CAFE) standards are regulations in the United States, first enacted by the United States Congress in 1975, after the 1973-74
Arab oil embargo, to improve the average fuel economy of cars and light trucks (trucks, vans and sport utility vehicles) produced for sale in the United States.
*OECD - The Organisation for Economic Co-operation and Development
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April 2017 Long-Term Thinking - Energy
growth are around 1 million barrels
carbon emissions from passenger
strikes us as a big challenge – there
per day, this represents a significant
vehicles an important contributor
may simply not be enough space,
increase that is roughly equivalent
to overall emissions, but there
or enough roads, to cope. This is an
to an additional year’s worth of
is increasing awareness of the
area we intend to spend more time
demand growth. It is also about the
impact that they have on urban air
researching in the coming months.
same size as the co-ordinated OPEC
quality. (Our conclusions from this
supply cut in the fourth quarter of
analysis assume that no effective
THE BOTTOM LINE
2016 that saw oil prices rise around
policy action is put in place to
Barring government intervention,
15%.
mitigate these trends.) Given the
particularly
across
densely
progress that has been made on
populated emerging markets, we
This is of course just one component
efficiency, and the crucial role that
believe that the demand for oil
in understanding the likely shape of
rising energy efficiency will play in
from passenger vehicles is likely
the supply / demand balance in oil
hitting our global targets on CO2
to outstrip consensus forecasts.
markets over the next decade, and
emissions, a key conclusion of
This
there may well be other factors we
our work has to be to urge policy
unanticipated factors that we have
identify in our research that offset
makers to take further action in this
outlined, peak oil demand is still
this.
area. This is especially true in the
some way in the distance. This
US where the direction of travel
could have negative implications
appears to be the opposite.
for climate change, although trends
Of course, a more rapid take-up of
electric vehicles could materially
alter
this
analysis.
Government
suggests
that
excluding
in power generation are likely to
CONGESTION – THE LIMITING
prove more influential.
policy is likely to be a substantial
FACTOR?
driver here. For example, Norway
Cities in China, and across many
From a capital markets perspective,
has one of the highest rates of
other emerging markets, may be
our analysis suggests that if oil
electric vehicle adoption in the
too densely populated to cope
demand does continue to grow
world – with one in every two new
with the projection for new cars.
through
the
cars sold either a fully electric or
We estimate that, of the 100 largest
decade,
production
hybrid vehicle – but also has one
cities globally, those situated in
going to be increasingly important.
of the highest rates of government
emerging markets have three times
Meanwhile, oil-producing companies
subsidy
in
the
world
remainder
of
this
trends
are
(around
the average population density of
and countries are likely to remain an
$10,000). Denmark also had high
developed market cities. To reach
active opportunity set for long-term
electric vehicle adoption rates, and
equivalent levels of car penetration
investors.
an even more generous subsidy.
However, this was withdrawn in
early 2016, resulting in plummeting
electric vehicle adoption. To make
a real difference, electric vehicle
sales would have to rise rapidly. We
estimate it would take around 150
million electric cars – about 15 times
the current global fleet – to offset
our estimate of extra oil demand.
The environmental consequences
could
be
significant.
All
the
evidence we have seen suggests
that government intervention can
make a significant difference to
consumer behaviour. Not only are
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April 2017 Long-Term Thinking - Energy
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