Don't forget that automobiles are not the only ultimate users of oil. Aviation will not be going electric any time soon. Petrochemicals now consume 14% of production and some think that it is this sector that will be largely responsible for maintaining demand out through 2050.
We've discussed this quite alot on this thread. Motor fuels are about 60% of oil consumption. Crude and condensates are only 83% of consumption. The rest is mostly NGLs from oil production and derived from natural gas and coal. There are also a small percentage of biofuels. So most of the actual crude oil is used for motor fuels. Petrochem is just as easily sourced from natural gas as from the lighter fractions of crude and condensates.
Moreover, gasoline and diesel are the primary drivers of refiners margins. There is not a whole lot a refiner can do economically to reduce gasoline and diesel in the production mix. Usining a different blend of crude can help a bit. This can alter the relative value of different grades of crude. Even so, as demand for gasoline and diesel falls, refiners will have problems maintaining health profit margins. What is more likely is that they will simply process less crude. Natural gas can readily make up the supply gap for petrochem feed gap. Biofuels can also focus production on jet fuel if that offers a higher margin than biodiesel or gasoline additives.
So the decline in gasoline and diesel production will have profound impact on the value of crude and how much and which kinds of crude refiners will process. The oil industry largely believes they have several decades to adjust to a different mix of product demand. The think the peak is out in the late 2030s and that the fall off in demand will be very gradual. Under these assumptions, it may be reasonable to believe that growing petrochem demand will give the industry plenty to work with.
But what they are not prepared for is a peak by 2025 that it could be followed by steep decline, gasoline and diesel demand falling as fast as 5% per year. In this scenario, the industry can be pushed beyond its ability to cope and adapt, too much change, too fast. They industry is just now starting to contemplate that peak crude demand could come by the end of the 2030s. But the question they should be asking is how fast and severe a disruption in demand are they prepared to handle.
Even those of us who are bullish on swift EV uptake are surprised to see things develops sooner than we optimistically expected. Specifically, total auto sales are going through a major slump. What none of us have solid data on is how much of this decline in ICE sales is a grand Osborne effect as people delay purchasing a vehicle that that they perceive will be quickly made obsolete. Increasingly a portion of car buys are becoming worried about ICE resale values. This Osborne effect may also apply to many existing EV models that now look inadequate compared to the Model 3 and other new production in the wings. For my part, the potential severity of this apparent Osborne effect is much bigger and sooner that what I had imagined beforehand.
But a grand Osborne effect could have a devastating impact on the oil industry. For several years drivers can stretch the average age of the fleet in lieu of buying so many new ICE vehicles. This need not mean that fuel demand falls now, but rather the pent up demand for EVs can mean that a smaller ICE fleet is more quickly replaced by EVs. To see why, consider the opposite. Suppose ICE sales were very high as EVs quietly ramp up production. All of these new ICE vehicles would lock in fuel demand for the next 15 to 20 years. Also EVs uptake competes against newer model vehicles allowing consumers the option to delay replacement with an EV. This bulk of new ICE gives the oil industry a soft landing. But the current decline in new car sales is eroding this soft landing years before a landing will be needed by the oil industry. So there are issues like this that could contribute to a more abrupt and severe transition than any of us might have imagined.
This post just recaps many of the issues we've debated for a couple of years. I think it is safe to say we'll all be surprised by how things actually play out.
