Why petroleum consumption won't disappear overnight

Mass produced electric cars. Oil price collapse. Record-setting renewable energy investment. Oil exploration at an all-time low.

These days, a lot of news headlines point to the struggles of the oil industry and even more point to the rapid advance of renewable technologies.  There is no denying that oil may be reaching a turning point of sorts.  The International Energy Agency (IEA) recently published a report suggesting that if the Paris Agreement is to succeed in limiting global warming to 2 degrees, that peak oil will need to occur within 5 years.  While the feasibility of such a rapid change is up for debate, it is clear that the world's energy mix is shifting and it is becoming easier to see a path towards a world with declining demand for oil.

 That said, even in the most extreme scenarios, do not expect oil demand to just disappear.  It is useful when considering the future of the oil industry to consider the way the world uses oil today.  Some energy demand currently satisfied by petroleum products could easily be replaced by alternate fuels, but some demand - barring technological advancements - is not currently replaceable. Take the United States as a case study.  Petroleum makes up over one-third of the total primary energy consumed in the country and that consumption amounts to approximately one-fifth of the world's petroleum demand.  But where does it all go?

 The vast majority of petroleum consumption (71%) sits in the Transportation sector.  61% of all demand goes to transportation vehicles in the form of gasoline and diesel and another 8% is consumed as aviation fuel. An additional 24% is consumed in industrial processes, with only 5% used for residential, commercial, and electrical power applications. 

Source: U.S. Energy Information Administration (EIA)

The chunk of petroleum demand most ripe for replacement lies within Transportation: the passenger vehicle.  As battery ranges improve, costs fall, and charging stations become commonplace, a mass-market electrical car with comparable performance to an internal combustion engine vehicle is looking inevitable. This switch won't occur overnight, however, and passenger cars are far from the complete picture.  Also included in the 61% bucket is fuel consumption related to other vehicles such as transport trucks, rail cars, and ships where a switch to electric is somewhat less imminent.

Replacing the remaining 40% is where it gets difficult.  With existing technology, there is no viable solution to converting aviation over to a non-petroleum fuel source (despite some dabbling with a revival of the airship). Similarly, petrochemicals are a key ingredient in many industrial products, including plastics. This demand for petroleum products only stands to grow in the future and will not easily be replaced.

 So, it seems that the flow of oil is not going to cease any time soon.  The same IEA 2-degree scenario that had peak oil occurring in 2020 also had demand in 2040 sitting at a level equal to a whopping 80% of today's demand. A sustainable future isn't necessarily one characterized by the complete absence of oil, however, it is certainly a future involving less of it.  We may not be at the end of oil, but the struggles of the oil industry are likely just beginning.

Dec 1, 2016 by: Andrew Dean, MBA2018

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