Will EVs Really Crush All Oil And Gas Demand?

By Alex Kimani - Apr 02, 2023

• There’s no denying that rapid adoption of EVs is bad news for global oil demand, the reality is probably nowhere near as dire as some analysts have claimed.
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• Energy Intelligence Group has predicted that not only will oil demand grow in 2023 but it will continue doing so till the end of the decade.
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• Demand growth will come mostly from petrochemicals, and transportation demand for fuels isn’t’ likely to fall off a cliff either.

 

 

  Last year, the electric vehicle sector crossed a global milestone, with one out of ten vehicles sold being electric for the first time ever. While that slice of the market might not seem like much in the grand scheme of things, another alarming trend for legacy ICE vehicle makers like Ford Motor Co. (NYSE:F), Mercedes-Benz Group AG and BMW is that their total vehicle sales declined despite EV sales more than doubling.

Obviously, oil and gas investors are receiving these developments with a bit of trepidation considering that EVs are seen as the arch-nemesis of the sector. And, this is no longer all about Tesla Inc. (NASDAQ:TSLA) alone, with pundits saying stiff competition from the likes of GM and Ford is coming its way.

GM is one of the legacy automakers with the biggest clean energy investments, particularly  in the EV sector. In 2022, GM delivered 39,096 all-electric vehicles in the U.S., up 57% year-over-year. While that figure accounts for just 1.7% of GM's total volume sold and cannot handle a candle to Tesla’s 1.3M EV sales, GM might turn the tables on Tesla a few years down the line. 

GM Ceo Mary Barra has revealed that the company plans to produce ~400,000 electric vehicles from 2022 through the first half of 2024, and that the company will  be capable of annual EV production of more than one million in North America in 2025. Indeed, GM could overtake Tesla in just two to three years: a 2022 "Car Wars" report has forecasts that GM and Ford Motors (NYSE:F) each will have roughly 15% EV market share in 2025 while Tesla will plummet from 70% to 11% with new products like the F-150 Lightning and Silverado EV electric pickups driving the robust growth. Tesla appears set to lose its dominant EV market share because both legacy automakers are expanding their portfolios and lineups at a much faster clip.

“GM has found a new life as an ESG play. We do have a sustainability fund that owns it in part because of their commitment to electrification. Mary Barra has been pretty vocal about that obviously, and it looks like it’s for real,” Christopher Marangi, Gamco’s value co-chief investment officer, told Bloomberg TV’s Surveillance.

Implications On Oil Demand

Over the years, there’s been no shortage of blue-sky forecasts from EV enthusiasts who have predicted an apocalypse for the oil industry that will be dished out by the EV revolution. 

That includes Stanford University economist Tony Seba who has declared that EVs will obliterate the global oil industry by 2030 while Bloomberg News’ Akshat Rathi is on record claiming that ‘every F-150 Lightning destroys 50+ barrels of oil demand forever.’ The F-150 Lightning is Ford Motors’ (NYSE:F) electric equivalent of the marquee Ford-150 truck. Meanwhile, back in 2016, Bloomberg itself predicted EVs will trigger a global oil crisis.

It’s not hard to see why these EV punters have been going ballistic. The transportation sector is responsible for nearly 60% of global oil demand, with passenger vehicles and trucks guzzling the lion’s share. EV sales are surging thanks to a combination of new compelling models from automakers, improvements in battery technology, policy support and more charging infrastructure. Electrification is also beginning to spread to new segments of road transport.

While there’s no denying that rapid adoption of EVs is bad news for global oil demand, the reality is probably nowhere near as dire as analysts like Seba have claimed. BNEF estimates EVs are currently displacing 1.5 million barrels of oil demand per day, good for 3% of total road fuel demand. But projections of the EV growth trajectory are all over the place, making it difficult to estimate how much impact the sector will have on future oil demand.

According to BNEF, just over half of passenger cars sold in the U.S. will be electric vehicles by 2030. Forecasts for the penetration of EV to total passenger car sales by 2030 range from 11% at the low end to 63% at the high end while projections for 2050 range from 31% to nearly 100%. The lower end of these forecasts suggests minimal to gradual displacement of oil demand while the higher end suggests quite severe oil demand destruction. 

Related: U.S. Drilling Activity Slips Following Price Slump

In carbon-constrained forecasts, passenger vehicle oil demand is expected to fall from about 25 million barrels per day today to 3–6 million barrels per day by 2050. However, most other forecasts see passenger vehicle oil demand ranging from 10 million to 20 million barrels per day by 2050.

Petrochemicals To Drive Oil Demand

Energy expert Energy Intelligence Group has predicted that not only will oil demand grow in 2023 but it will continue doing so till the end of the decade. According to the analyst, global oil demand is expected to grow by 1.5 mb/d in 2023, with China accounting for 650,000 b/d after the country abandoned its rigorous zero-Covid policy. Global oil demand will hit 101.2 million barrels per day in the current year and will continue growing to hit 106 mb/d by 2030. Indeed, this year’s average is expected to exceed the previous high of 100.6 mb/d set in 2019. 

While this is great news for the oil bulls, the expert says that growth will primarily be driven by petrochemicals rather than transport fuels. Energy Intelligence Group has also said that its base case is a plateau rather than a decline. Actually,  Energy Intelligence is not the only bull here. Below is a table that compares oil demand predictions by 28 organizations including a handful of Big Oil companies.

Oil Demand to 2050
(million b/d)	Peak	2030	2040	2050	2021-50
Energy Watch Group (0 Gt)	<2021	72	31	0	-100%
UNPRI 1.5 (2 Gt)	2025	88	46	20	-79
IEA Net-Zero (0 Gt)	<2021	72	43	24	-74
BP Net-Zero (2 Gt)	<2021	90	55	24	-74
UNPRI Forecast Policy (9 Gt)	2026	99	63	37	-61
IPCC 1.5°C Low Overshoot (1 Gt)	<2021	86	63	41	-56
Total Rupture	<2021	88	59	41	-56
Equinor Rebalance (9 Gt)	<2021	88	61	46	-51
BP Accelerated (10 Gt)	2025	96	72	47	-50
IPCC 1.5°C High Overshoot (6 Gt)	<2021	99	78	53	-44
DNV (19 Gt)	2024	85	69	49	-48
IEA Sustainable Development (8 Gt)	<2021	88	65	57	-39
Total Momentum	<2021	94	74	63	-33
IPCC 2°C (14 Gt)	2030	100	88	70	-26
IEA Announced Pledges (21 Gt)	2030	96	84	77	-18
BP New Momentum (31 Gt)	2030	101	92	81	-14
Equinor Reform (24 Gt)	2030	100	92	84	-11
Shell Sky 1.5 (18 Gt)	2025	100	94	85	-10
IPCC 2.5°C (29 Gt)	2040	105	107	99	+5
Shell Islands (34 Gt)	2040	102	104	102	+8
IEA Base (34 Gt)	2040	103	104	103	+9
IPCC 3°C (38 Gt)	2040	104	108	106	+13
Exxon	>2040	104	107	107	+14
Opec (34 Gt)	>2045	107	108	108	+15
Equinor Rivalry (32 Gt)	>2050	107	110	110	+17
IPCC 4°C (52 Gt)	2040	107	111	111	+18
Shell Waves (35 Gt)	2040	111	119	111	+18
US EIA (43 Gt)	>2050	109	117	126	+34%
Projected oil demand to 2030-50 in million barrels per day in a range of scenarios. When available, projected CO2 emissions in billion tons are shown in parenthesis (2021: 34 Gt). Source: BP, DNV, Equinor, EWG, Exxon Mobil, IEA, IPCC, Shell, TotalEnergies, UNPRI, US DOE

Source: Energy Intelligence Group

You will notice that no less than 10 organizations, including OPEC, Exxon Mobil (NYSE: XOM) and the Energy Information Administration (EIA), have predicted that global oil demand will actually grow as we go along and not shrink as most analysts have forecast.

To be fair, it’s hard to be bullish about the long-term oil demand trend given that climate mandates are unlikely to ease, which coupled with the EV explosion as well as rapidly improving efficiency for gas-powered vehicles, are sure to limit oil consumption. Indeed, the Intergovernmental Panel on Climate Change's (IPCC) recently warned that keeping a 1.5ºC or even 2ºC warming limit in sight will require a big strengthening of current policies. In fact, Paris-compliant energy scenarios assume oil and gas demand will fall by respectively 40%-80% and 20%-60% between now and 2050 while gas demand needs to peak from 2025-2030.

Meanwhile, a plethora of innovations, such as gasoline direct fuel injection, turbocharged engines, automatic transmissions with more gear ratios, and stop/start systems that shut off the engine instead of allowing it to idle has improved fuel efficiency of new vehicles quite dramatically. New U.S. cars now travel nearly twice as far per gallon as they did at the start of the Obama administration, while light trucks and SUVs have increased efficiency by a more modest 59%. About 26% of crude production is consumed by the transport sector.

The big takeaway here is that EVs are likely to pose a substantial threat to the fossil fuel industry over the long-term. 

By Alex Kimani for Oilprice.com

Arms Deals Bring Russia And Iran Closer, But Will The Relationship Last?

By RFE/RL staff - Apr 03, 2023

• Iran and Russia have engaged in arms swapping.
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• Iran is providing military drones and short-range missiles to Russia in exchange for advanced Russian military technology.
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• The deepening military cooperation between the two countries has raised concerns for the US.

When Iranian President Ebrahim Raisi visited Moscow in early 2022, he had high hopes of leaving with defense deals that would circumvent international sanctions and take advantage of the expiration of a United Nations embargo on arms trading with Tehran.

Russian fighter jets, advanced antimissile defense systems, and other high-tech military equipment were high on Raisi's wish list. But questions arose: What could sanction-hit Iran, short on cash and technology, offer energy-rich Russia in return? And would Russia be willing to send advanced military technology to Iran at risk of angering rival states and important customers in the Middle East?

Russia's invasion of Ukraine just a month after Raisi's visit provided the answer.

As it became apparent that the war would drag on much longer than the Kremlin anticipated, depleting Russia's arsenal, Moscow turned to Iran for military drones that have proved to be a deadly addition to Russia's war effort. Iranian short-range missiles, as well as shells and ammunition, have reportedly helped shore up dwindling supplies. And there are suggestions that Iranian ballistic missiles could be delivered in the future.

In exchange, Iran is anticipating the delivery of advanced Russian Su-35 combat jets, S-400 antimissile systems, a military satellite, and other long-sought military equipment. CNN has reported that Russia is sending captured weapons that the United States supplied to Ukraine on to Iran, where they could potentially be reverse-engineered to produce Iranian-made equivalents.

And according to The Wall Street Journal this week, Russia is also aiding Tehran's efforts to clamp down on persistent antiestablishment protests at home by providing advanced surveillance software.Su-35 Deal Goes Down

Immediately after the UN arms embargo against Iran expired in 2020, Tehran lauded the opportunity to strengthen its security.

The lifting of the arms ban was part of the terms of the moribund nuclear deal signed between Iran and world powers in 2015, which curbed Tehran's sensitive nuclear activities in exchange for relief from international sanctions.

The 13-year embargo had denied Iran the right to import or export conventional weapons, making Tehran largely dependent on its own military technology to keep pace with regional foes Saudi Arabia and Israel.

Remaining U.S. sanctions continued to limit Iran's ability to import technology, particularly any that could aid Iran's suspected efforts to develop nuclear weapons, and the European Union maintained its own arms embargo on conventional arms and missile technology in an attempt to get Iran to adhere to the nuclear deal after Washington unilaterally withdrew from the accord in 2018.

But the lifting of the UN embargo opened a window for conventional arms trading with Iran, with Russia and China seen as the most likely suppliers.

Raisi described his two-day visit to Moscow in January 2022 as a "turning point" in Tehran's relationship with Russia as Iranian officials expressed interest in purchasing fifth-generation Russian fighter jets, air-defense systems, helicopters, and tanks. Acknowledging Iran's strapped budget, however, defense experts suggested Iran was unlikely to invest in prohibitively expensive combat aircraft.

Air-Combat Veterans

For decades, Iran has struggled to maintain an air force that depends largely on U.S. aircraft purchased before the 1979 Islamic Revolution, with some dating back to the 1960s. Longstanding U.S. sanctions denying Iran access to spare parts for its aging F-5s, F-14s, and F-4 Phantoms have left Iran with a patchwork fleet of U.S. aircraft, Iranian aircraft modeled on U.S. aircraft, and some Chinese and Russian warplanes purchased in the 1990s.

While Iran's wish for Russian four-plus-generation Su-30 multirole fighters had been denied for years, the Su-35 -- a fourth generation fighter-bomber and Russia's only serially produced fighter aircraft for export -- surprisingly emerged as Iran's best hope to update its air force.

In January 2022, as U.S. sanctions pressure intensified amid concerns of an impending Russian invasion of Ukraine, Egypt canceled an estimated $2 billion contract for the delivery of Su-35s. Cairo's move followed similar terminations of discussions to sell Su-35s to Indonesia and Algeria.

"The Su-35 is the best multirole fighter the Islamic Republic of Iran Air Force (IRIAF) could hope to acquire in a short timeframe," Jeremy Binnie, Middle East defense specialist at the global intelligence company Janes, told RFE/RL in written comments. "The aircraft have been sitting in the open at the Komsomolsk-on-Amur Aircraft Plant since they started coming off the production line in 2020."

While it was expected that Iran would try to get the Su-35s once bound for Egypt, the sticking point was whether Tehran would be willing to allocate funds for the air force at the expense of weapons-development programs or the budget of the powerful Islamic Republican Guards Corps (IRGC).

In January, Iran's semiofficial Tasnim news agency quoted Shahriar Heidari, head of the Iranian parliament's National Security and Foreign Policy Commission, as saying Iran would receive 24 Su-35s as early as this month. Heidari also said Iran had ordered helicopters, air-defense systems, and missile systems from Russia.

While the specifics of the Su-35 deal have not been confirmed, Binnie said, "We could speculate that Russia's urgent need for one-way-attack [drones] helped tip the equation" in favor of Iran's air force. This he added, "would reflect an interesting Russian calculus that these cheap but long-range weapons are actually more useful than advanced multirole fighters" in the Ukraine war.

The Su-35 has had a spotty record in the Ukraine war, with Ukrainian forces claiming to have shot down many of them. But the deployment of more modern fighters to the Ukrainian battlefield has led Kyiv to express worries that they will significantly strengthen Russia's ability to dominate the skies.

Binnie said he believes the Su-35s will be used "primarily in the air-to-air role, based deep inside Iran to increase their survivability so they can be scrambled to intercept aircraft coming in to attack the nuclear and other strategic sites."

This, he added, will essentially take over the role of the U.S.-made F-14s based in Iran's central province of Isfahan while providing a "massive improvement on those 1970s-vintage aircraft."

Challenges Of Cooperation

During a recent trip to the Middle East, U.S. Defense Secretary Lloyd Austin expressed concerns over Russia's deepening military cooperation with Iran over the past year, saying it "poses serious challenges" for the region.

Austin highlighted the "lethal consequences" of Iran's provision of drones to Russia and the potential for Moscow to send "technology to Iran in exchange for its assistance."

Austin also reaffirmed the U.S. commitment to never allow Iran to acquire a nuclear weapon.

To this point, there is no indication that nuclear-power Russia's defense cooperation with Iran might expand beyond conventional weaponry.

The addition of Su-35s to Iran, while helpful, are not seen as a panacea for its air force's capabilities in the face of better-equipped regional foes.

And while Russia's S-400 antimissile system, of which at least one has been ordered according to Iranian media, would boost Iran's ability to fend off potential air strikes, its provision would not violate previous UN or existing EU arms embargoes because it is a defensive weapon.

Just A Fling?

Regarding the prospect of future arms deals, Binnie said he expects both Moscow and Tehran to take a cautious approach that will not risk weakening their own defenses or transfer top technology.

"For example, due to import restrictions, Russia's military industries will probably struggle to replace any S-400 that is taken out of the line and transferred to Iran," Binnie said. And "supplying ballistic or cruise missiles to Russia would reduce Iran's deterrent against attack."

Advanced Russian tanks, which are at a premium on the Ukrainian front, would also likely not be on offer to Iran.

Speaking about the state of current U.S. sanctions against Iran and Russia, Peter Piatetsky, a former U.S. Treasury Department official who is now the CEO of the consultancy firm Castellum.AI, said they are not designed to stop cash or barter deals between the two states.

"It doesn't mean that sanctions are not effective; they simply are not designed to seize physical items like cash or weapons," he said. "Sanctions can be imposed on the persons involved, but with both Iran and Russia being international pariahs, they don't seem to care."

As for whether Russia and Iran's defense dealings can last beyond the current state of mutual need in the face of domestic economic issues, sanctions, and international pressure, Piatetsky said it will play out much like any relationship.

"What starts out as a relationship of convenience can become a true partnership. True partnerships can crumble and become transactional, true partnerships can endure stress and grow stronger, and parties can also enter into a relationship of convenience and stay in it despite resentments and a lack of mission alignment because they cannot identify better options," he said. "Russia and Iran are in the latter bucket."

By RFE/RL

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