In the early years of US oil production in the late 19th century, gasoline was considered a useless byproduct of kerosene that would be burnt off or dumped in rivers.
That changed when the first mass-produced automobiles hit the road. But just over a century later, the symbiotic relationship between oil and cars which transformed society is beginning to fray.
Recent announcements by the UK and France of plans to ban sales of new petrol and diesel vehicles by 2040 have amplified two critical questions for the petroleum industry: will electric vehicles (EVs) cause oil demand to decline and, if so, when?
Executives at the world’s biggest oil companies have offered some answers — sceptics would call them guesses — in recent days, after revealing generally strong second-quarter results which raised optimism about near-term prospects even as doubts grow about the long term.
Ben van Beurden, chief executive of Royal Dutch Shell, made no attempt to disguise the challenge facing “Big Oil”. Companies must become more discriminating about which oilfields to develop, he said, with only the most low-cost and productive likely to remain competitive.
“We have to have projects that are resilient in a world where demand has peaked and will be declining,” he said. “When will this happen? We do not know. But will it happen? We are certain.”
Mr van Beurden said “peak demand” could come as soon as the late 2020s in the most bullish scenarios for EV uptake. But that would require “much more aggressive” policy action on climate change and faster innovation in battery technology than seen so far.
Many in the oil industry think the transition will take longer. ExxonMobil expects oil demand to keep growing into the 2040s, albeit at a slowing pace.
Which of these scenarios turns out to be correct will be determined by many factors but the future of the car is most important. Passenger vehicles accounted for 26 per cent of global oil demand in 2015, more than aviation, shipping and petrochemicals combined, according to the International Energy Agency.
UK and French plans to phase out petrol and diesel cars over the next two decades have added to policy momentum behind EVs. At least as important is increased commitment from carmakers.
Volvo said last month that all new models would be electric or hybrid from 2019. Tesla, meanwhile, stepped up efforts to break into the mass market with the launch last month of its much-hyped Model 3, billed as the company’s first affordable EV with prices starting at $35,000.
Yet it will not be Teslas in Britain and France that determine the fate of the oil industry. While crude demand is forecast to fall by almost 12 per cent between 2015 and 2040 in wealthy OECD countries, it is expected to grow by 19 per cent in non-OECD countries, according to the IEA. By the end of that period, 60 per cent of demand will come from outside the OECD.
Mr van Beurden said that the internal combustion engine would prove more durable in the developing world, where car ownership was growing strongest.
“We still have less advanced economies which cannot simply make that switch [to EVs] because they do not have the electrical infrastructure and . . . the wealth to do so.”
Bob Dudley, chief executive of BP, said that, while the rise of EVs was “inevitable”, conventional cars would continue to dominate for decades. “We’ve forecast that 100m electric vehicles will be on the road by 2035. Even if you doubled that to 200m, there would still be 2bn conventional vehicles on the road,” he said.
Mr Dudley’s forecast is similar to one last month from Goldman Sachs, which foresaw EVs growing from 0.2 per cent of vehicles on the road in 2016 to 5 per cent in 2030.
Declining oil demand from cars is also likely to be offset by growth in aviation and heavy freight transportation, which are harder to switch to alternative fuels. Petrochemicals will be another enduring source of demand.
“Even when legacy fuels begin to lose market share, history tells us that absolute demand for them continues to rise,” said Amin Nasser, chief executive of Saudi Aramco, last month, citing growth in coal throughout the 20th century even as its share of the global energy mix declined.
But some analysts think this benign view is badly mistaken. Far from holding back EVs, the developing world could become an accelerant if China and India make good on their industrial ambitions in battery technology.
China is already the world’s biggest EV market, and its companies are beginning to dominate battery manufacturing in a way to that has led analysts to point to similarities with how they drove down the cost of solar panels.
Kingsmill Bond, analyst at Trusted Sources, a research company, predicts a “tipping point” early in the 2020s as EVs reach cost parity with conventional vehicles. “The rise of the EV is yet another indicator of the systemic change in energy markets, and an early warning for oil investors,” he said.
These widely divergent forecasts of gentle or wrenching change are confronting oil companies with a strategic dilemma.
Should they focus on maximising returns from their sunset businesses in the way that tobacco companies have continued to profit from a declining market? Or should they make the big, risky investments needed to transition towards renewable energy?
The global oil majors are still in the early stages of addressing those questions. Shell has the most obvious bias towards the latter strategy so far, with plans to spend up to $1bn a year on alternative energy. That remains a tiny fraction of overall capital expenditure but Mr van Beurden said that Shell would be ready to move faster if needed.
“Every year we invest between $25bn and $30bn. We are a $280bn company so every decade we build a new Shell all over again and that gives us a lot of flexibility to adapt,” he said. “We are not some sort of sitting duck that has nowhere to go.”
