Sunday, March 26, 2017

The Demand for Oil will drop but is that enough?


                                                   Comments due by April 7, 2017

IT HAS BEEN a bad couple of years for those hoping for the death of driving. In America, where cars are an important part of the national psyche, a decade ago people had suddenly started to drive less, which had not happened since the oil shocks of the 1970s. Academics started to talk excitedly about “peak driving”boomers, car-shy millennials, ride-sharing apps such as Uber and even the distraction of Facebook. Yet the causes may have been more prosaic: a combination of higher petrol prices and lower incomes in the wake of the 2008-09 financial crisis. Since the drop in oil prices in 2014, and a recovery in employment, the number of vehicle-miles travelled has rebounded, and sales of trucks and SUVs, which are less fuel-efficient than cars, have hit record highs. This sensitivity to prices and incomes is important for global oil demand. More than half the world’s oil is used for transport, and of that, 46% goes into passenger cars. But the response to lower prices has been partially offset by dramatic improvements in fuel efficiency in America and elsewhere, thanks to standards like America’s Corporate Average Fuel Economy (CAFE), the EU’s rules on CO2 emissions and those in place in China since 2012. The IEA says that such measures cut oil consumption in 2015 by a whopping 2.3m b/d. This is particularly impressive because interest in fuel efficiency usually wanes when prices are low. If best practice were applied to all the world’s vehicles, the savings would be 4.3m b/d, roughly equivalent to the crude output of Canada. This helps explain why some forecasters think demand for petrol may peak within the next 10-15 years even if the world’s vehicle fleet keeps growing. Occo Roelofsen of McKinsey, a consultancy, goes further. He reckons that thanks to the decline in the use of oil in light vehicles, total consumption of liquid fuels will begin to fall within a decade, and that in the next few decades driving will be shaken up by electric vehicles (EVs), self-driving cars and car-sharing. America’s Department of Energy (DoE) officials underline the importance of such a shift, given the need for “deep decarbonisation” enshrined in the Paris climate agreement. “We can’t decarbonise by mid-century if we don’t electrify the transportation sector,” says a senior official in Washington, DC. It is still unclear what effect Donald Trump’s election will have on this transition. In a recent paper entitled “Will We Ever Stop Using Fossil Fuels?”, Thomas Covert and Michael Greenstone of the University of Chicago, and Christopher Knittel of the Massachusetts Institute of Technology, argue that several technological advances are needed to displace oil in the car industry. Even with oil at $100 a barrel, the price of batteries to power EVs would need to fall by a factor of three, and they would need to charge much faster. Moreover, the electricity used to power the cars would need to become far less carbon-intensive; for now, emissions from EVs  powered by America’s electricity grid are higher than those from highly efficient petrol engines, say the authors. My kingdom for a cheap battery They calculate that at a battery’s current price of around $325 per kilowatt hour (kWh), oil prices would need to be above $350 a barrel for EVs to be cost-competitive in 2020. Even if they were to fall to the DoE’s target of $125 per kWh, they would still need an oil price of $115 a barrel to break even. But if battery prices fell that much, oil would probably become much cheaper, too, making petrol engines more attractive. Even with a carbon tax, the break-even oil price falls only to $90 a barrel. Those estimates may be too conservative, but the high cost of batteries and their short range help explain why EVs still make up only 0.1% of the global car fleet (though getting to 1m of them last year was a milestone). They are still mostly too expensive for all but wealthy cleanenergy pioneers. Many experts dismiss the idea that EVs will soon be able seriously to disrupt oil demand. Yet they may be missing something. Battery costs have fallen by 80% since 2008, and though the rate of improvement may be slowing, EV sales last year rose by 70%, to 550,000. They actually fell in America, probably because of low petrol prices, but tripled in China, which became the world’s biggest EV market. Next year Tesla aims to bring out its more affordable Model 3. It hopes that the cost of the batteries mass-produced at its new Gigafactory in Nevada will come down to below $100 per kWh by 2020 (see chart), and that they will offer a range of 215 miles (350km) on a single charge. Countries that have offered strong incentives to switch to EVs have seen rapid growth in their use. Norway, for instance, offers lower taxes, free use of toll roads and access to bus lanes. Almost a quarter of the new cars sold there are now electric (ample hydroelectricity makes the grid unusually clean, too). This bodes well for future growth, especially if governments strengthen their commitment to electrification in the wake of the Paris accord. The Electric Vehicles Initiative (EVI), an umbrella group of 16 EV-using nations, has pledged to get to 20m by 2020. The IEA says that to stand a chance of hitting the 2ºC globalwarming target, there would need to be 700m EVs on the road by 2040. That seems hugely ambitious. It would put annual growth in EV sales on a par with Ford’s Model T—at a time when the car industry is also in a potentially epoch-making transition to self-driving vehicles. But imagine that the EVI’s forecast were achievable. By 2020 new EV sales would be running at around 7m a year, displacing the growth in sales of new petrol engines, says Kingsmill Bond of Trusted Sources, a research firm. Investors, focusing not just on total demand for oil but on the change in demand, might see that as something of a tipping point. As Mr Bond puts it: “Investors should not rely on the phlegmatic approach of historians who tell them not to worry about change"

13 comments:

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Tasfin Hossain said...

This article is pretty relevant and something that has been on my mind for the past couple of days. Switching from gas guzzling cars to hybrid cars might help a person significantly lower their carbon footprint. And it is true that driving a electric car over a traditional cars can be costlier, and that’s why the example of Norway gives me a glimmer of hope. Here, states like California offer rebates, discounts, tax breaks and other incentives to people who drive hybrid and electric cars. If other states can follow California’s footsteps and provide these incentives, people would be inclined to go for an electric car. As stated in the article, passenger cars provide a large portion of the total carbon emissions. I feel if more people buy electric cars, the numbers will go down drastically. And even if our 2ºC global warming target may seem almost impossible, I still think it can be achievable.

Tasfin Hossain

Anonymous said...

It seems that the paradigmatic shift surrounding the use of electric vehicles is slowly but surely taking hold. On the firms' side, I do agree on the necessity to create cheaper cars, if that means creating cheaper batteries or new, innovative production methods that would allow for cheaper mass production. The primary obstacle, in my opinion, that surrounds electric/EV cars is cultural elitism - many people that drive Teslas are generally wealthier individuals that can afford such a high cost of a car that competes with luxury-tiered automakers.

The next most difficult obstacle is shifting the political calculus that has very much so changed in the Western world. Many world governments are experiencing a shift in their cultural base in terms of conservatism, which impacts leadership and support for these types of climate-based initiatives. It will be important to understand how firms and society can impact the political bottom line that concerns our governments.

Chase Harnett said...

It is apparent that electric cars are becoming more popular. These forecasts for electric car popularity do not seem that "far out". We have seen trends in technology grow faster and become more widespread in a shorter period of time than what was discussed in the article concerning EV's. The smartphone trend spread like wildfire around the globe in less than twenty years. New models replaced older ones as they were developed while the total amount of users increased. Also, we saw a few rival competitors join the market as the technology became more popular. I think it would be fair to say that we will see a couple companies begin to get involved in the EV market. For now, it is clear that Tesla is at the leading edge of the market and in development. There will soon be a Microsoft to that Apple. I look forward to seeing this technology develop!

Chase Harnett

Bradley Pidgeon said...

I think that the future of electric cars is highly dependent on the millennial generation. Even if money were not a factor, a lot of millennials are concerned with the environment and minimizing carbon footprint. Choosing a more fuel efficient or electric vehicle is a simple way that someone can reduce their carbon footprint without really changing anything in their lives. Carpooling and ride share services are also becoming more popular, especially as populations are growing and roadways become more and more congested. Even in areas where populations are not as dense as say NYC or other big cities, people see it more efficient to save on gas and tolls when they carpool. When the economy is in a boom, and disposable incomes are higher, people may be more likely to drive and buy larger cars. But, at the same time, many would still choose to spend less on gas and save that money or spend it elsewhere. Oil supply constraints in the future should also be more heavily acknowledged now, and unaware consumers would respond by adjusting buying and driving habits.

Austin Provancher said...

I agree with what the professor has written and the points that are supported by the experts. I agree that we must electrify the transportation going forward to save on emissions released and the gas being used. According to the Huffington Post RIT- leading tech college gives prime examples why the electric car is good for the future. The electric vehicle are inherently more efficient at turning energy into miles driven. In addition, they are greener and can be powered by multiple energy sources.

An awesome electric vehicle I would like to point out is the BMW I3 Range Extender. The car is technologixally advanced with giving the customer 180 miles until "E". 114 from energy and the rest with a backup gas tank. The car takes anywhere from 3-8 hours to charge fully and can be seen as a hot item to a green customer. Its certainly worth checking out.

http://www.huffingtonpost.com/bill-destler/electric-cars_b_1929481.html

Katherine Murphy said...

This issue has always been in the back of my mind, due to the fact that I don't drive anywhere anymore. But, the article brings up some key points about focusing on the change in demand, rather than just the demand for oil in the future. The Norway example, is a good way at looking at the future of decreasing oil demand, and increasing more energy efficient solutions. Though electric vehicles may be costlier in the meantime, it will benefit economically and environmentally in the long run. With the right incentives, such as the Norwegians incentives for engaging in clean energy, people are more likely to side with ideas like this. The millennial generations is the generation of consumers, and we are told to buy and upgrade to the next big things. Sustainable solutions and clean energy, I believe, are the next big thing. These electric vehicles will become more common, which will break the wealthier class reputation the car gets. Since most electric cars, such as Tesla, are categorized within the higher class spectrum.

Angelique Cardoza said...

I believe that clean energy fueled cars are the future. Millennials know this and support this more than prior generations. For example, when a parent buys a car for their teenager, their major concerns consist of the price and whether the car is reliable or not. Now, electric cars have proven reliability, but the price for these cars are not distinctively cheaper. Not yet. In order for consumers to buy more clean energy fueled cars, incentives have to be better or prices need to decrease. These cars need to be made affordable to all types of consumers because the reality is that society gives more value to saving money than reducing emissions.

Elizabeth Eggimann said...

I think similar to what Michael Moore has recommended with the US health care system, states such as New York and California should be leading the way in electrifying the transportation sector. It is states like ours that should be taking an initiative and showing the rest of the country what is possible…


Also, our government should be offering incentives to switch to EVs. The more we invest in the sector, the more potential it has and the cost can be driven down. I think that there needs to be some form of intervention from the government to keep the oil costly and help lessen the cost of EVs.


I think that there is an undertone with driving electric vehicles and we should make an effort to try to lessen that stigma. Often times in conversation I’ve notice people tend to associate electric vehicles while environmentalism and unfortunately, many people do not identify as environmentalist. But really, electric vehicles are just more efficient. Traditional cars running on an internal combustion engine have a 30 percent efficiency rate, whereas vehicles that run on electricity have an 80% efficiency rate. The efficiency is greater because of the superiority of the electric motor over that of the internal combustion engine not because one unit of energy is better than another. With an efficiency difference that great, anything is cleaner than burning gasoline. We should be reshaping the appeal of electric vehicles so that they will be desirable to a larger demographic.

Lindsay Brewster said...

It is interesting to know that people who assumed that millennials were dropping the rates of driving were wrong, and it in fact was the economy. The problem there is that electric cars are quite expensive, so if the economy were to not do well, people may swing for cheaper, gas run cars than electric ones. Also, I do think there is a stigma around electric cars. When I hear people talking about someone who owns an electric car, terms like "tree hugger" are often said. Eliminating this stigma, as well as lowering prices of electric cars, are in my opinion two crucial steps in making electric cars more popular than gas run cars.

Brielle Manzolillo said...

It's interesting to read that these statistics about car sales, especially SUV's, growing higher in recent times. I would have thought that they would be dropping due to the fact that this new generation of millennial's are more energy and money conscious than previous generations. It's "hip" to have a hybrid car as apposed to a gas guzzling vehicle. People use the carpooling options on car service apps not only for a drop in price, but also for environmental reason. It has me wondering if millennial's aren't the ones buying these cars and instead, older generations such as the baby boomers are still partaking in these inefficient purchases.

The stigma surrounding electric cars also needs to end. Even when you watch tv, the stereotypical "tree hugger" character always references their electric car. People are probably afraid to buy them due to not wanting to be portrayed a certain way. Also, they are very expensive currently. However, people need to realize that in the long run, they are more beneficial economically and environmentally.

Anonymous said...

As technology becomes more and more relevant in the automobile production process, the future of electric cars continues to grow. As demand for oil is decreasing; the demand for electric cars continues to grow. With the environment being a main focus in today's society, the electric car market is becoming more and more popular. With a target of 2 degrees celsius by 2040; it seems like an attainable goal. Consumers are becoming more conscience about the environment because if it is not cared for; there will be no future. If liquid fuel usage continues to drop this will be better for the environment and even help the peak oil theory. As EV's and hybrids become more popular, the demand for oil is decreasing. Since transportation is necessary for many consumers to get to and from locations it only makes sense to work towards something that will help sustain the environment and our future as consumers. Although EVs are on the more expensive side, as technology continues to advance, the price will drop and EVs will be more affordable to the average everyday consumer. It is up to generation Y and the Millennials to push the electronic vehicle movement. This will help the environment and help sustain life as a whole.

Nick Arciszewski

Janelle Gonzalez said...

An interest in EV's should be higher as people are making efforts to conserve resources, such as oil. The above post demonstrates the increased awareness of the importance of making choices that will prevent any further depletion. Efforts are being made as the demand for oil will decrease.

It is important that as younger generations are more educated about preserving natural resources, making eco friendly choices becomes more trendy. It should be a priority in government to encourage such eco friendly choices with benefits such as tax benefits, discounts, and other incentives.