Recent commentaries have been quick to peg the unfolding coronavirus pandemic as the second, or perhaps third, ringing of oil’s death knell. To be sure, the lockdowns are destroying oil demand at an unprecedented scale. Yet trying times demand perspective. The current oil demand destruction will be temporary. When economies around the world sputter back to life, they will still rely on oil.
Current gloom notwithstanding, oil will likely remain the world’s most important energy resource for multiple decades. Could the world move to “tele-everything” and permanently erode oil usage? Possible — but unlikely. The coronavirus probably won’t reduce commuting as much as we think. And teleconferencing cannot transport the trillions of dollars in physical goods that move around the world each year. The most relevant “energy transition” between now and 2040 is less likely to be about leaving oil behind and more likely to emphasize finding ways to harness it at lower environmental and geopolitical cost.
A powerful trinity will drive oil’s persistence: energy density, scale, and legacy. Let’s unpack these concepts. “Energy density” refers to the reality that gasoline, diesel, and jet fuel are fantastic energy carriers. Even adjusted for the relative inefficiency of contemporary internal combustion engines, 35 liters (nine U.S. gallons) of gasoline weighing about 28 kg (60 lbs) can deliver the same propulsive energy to a vehicle’s wheels as a Tesla P100D car battery weighing more than 20 times as much. And oil products are convenient to use. Tesla’s highest end Supercharger can theoretically charge a 200 kWh e-pickup battery in 48 minutes. Common gasoline pumps all over America are able to deliver that much energy in less than one minute.
“Scale” means the billions of oil-burning engines operating globally on roads, rails, construction jobsites, oceans, and in the skies and the massive infrastructure designed to support their operations. “Legacy” means the fact that many of the machines operating today make economic sense to run for another 15-20 years and that more of them are sold with each passing week, baking in future demand.
A car owner who spent USD 30,000 two years ago for a gasoline vehicle is unlikely to part with that machine if a great electric vehicle comes to market next year. Even more so for a trucker who spent USD 300,000 for their rig or a shipowner or airline that spent USD 30 million or more per unit for their new equipment. These heavy transport systems drive close to 40% of total global oil use.
Even if subsidies and other incentives induce some current owners of oil-burners to replace their systems with something electric, the massive installed base makes the catch up arithmetic brutally tough. If the “average” car in the roughly billion unit global passenger car fleet is driven for 20 years before scrappage, this would imply a 5% annual turnover rate—a 50 million vehicle per year replacement market opportunity.
Global EV makers delivered 2.2 million units in 2019. They would thus need to scale up production and sales five-fold just to turn over 1% of the global car fleet each year. Such a huge expansion of the EV industry would face enormous challenges. To boot, cheap oil-based fuels yielded by the price war hurt electric propulsion’s competitiveness vis-à-vis petroleum across the transport and off-road machinery spectrum.
Real world data show just how hard it is for electrification to displace oil demand. Norway has for nearly 30 years funded a set of aggressively pro EV policies that have raised electric vehicles’ market share to more than half of new vehicles sold. Yet BP Statistical Yearbook data reveal that 2018 — the latest year available — marked Norway’s highest recorded oil consumption since 1965. Data from California — the most EV-supportive jurisdiction in the United States — tell a similar story.
Without scalable substitutes on the horizon, oil appears poised to retain its carbonaceous crown for some decades to come. This persistence will continue to create opportunities for capital to reap returns in oil, even if it’s hard to see that amidst the current darkness. Innovative producers will adapt and continue finding ways to produce oil at a profit. Tough price cycles are Darwinian selectors among oil companies, not extinction events for the entire sector.
Oil use certainly brings environmental liabilities and also exposes consumers to certain odious oil exporting regimes. But for the foreseeable future, something still needs to power the physical movement of billions of people and trillions of dollars in tangible goods each year. Oil is “sticky” and the coronavirus shutdowns, carbon divestment, digitization, electrification, and other forces are very likely not strong enough to dislodge it soon. Oil still a relevant and profitable business in 2040? Bet on it.
This post originally appeared in the Forbes Blog on April 6, 2020.
