What is the future of oil?
In 1980, 23 billion barrels of oil were produced worldwide and reserves (683 billion barrels) were to last for 30 years. It has been almost 40 years since the forecast was made and, as it turned out, it was far from correct. By the end of last year, nearly 1,000 billion barrels of oil had been produced across the world, and reserves are estimated at more than 2,000 billion barrels, which should last for 70 years. This means that global oil reserves have been growing faster than output. This results primarily from advancement in exploration and production technologies which make it possible to drill for oil in previously inaccessible deposits, such as source rocks (shales, oil sands) and deep-water oil fields, but also from a slowing growth in oil demand in various regions of the world. For example, in OECD countries the demand has been declining consistently since 2005. When asked about the future of oil, Zaki Yamani, Saudi Arabia’s former oil minister, noted: „The Stone Age came to an end not for a lack of stones and the oil age will end, but not for a lack of oil”.
An obvious question is when the global demand for oil will begin to decline? There are two opposing views on that. According to one of them, prevalent until recently, the rumours of global demand peaking soon are exaggerated. Large oil reserves and the advancement in production technologies are conducive to a low oil price environment. This would boost demand and more expensive oil reserves would have to be tapped, and the industry would be back to business as usual. In those scenarios, oil prices approximate USD 70−80 per barrel (in constant US dollars) in the long term, generally assumed to be 20 years. Three years ago the price of oil was believed to reach USD 100 per barrel in the long term, but the price expectations are revised downward year by year, reflecting improved production efficiency.
The other view, which has captured much attention of late, predicts the end of the dominant role of oil in transport and the end of oil as a power generation fuel (outside the OECD as OECD countries already went through this process after the oil shocks of the 1970s and 1980s). Although more oil will be consumed as feedstock by the petrochemical and chemical industries, by 2050 overall global demand for crude oil and liquid fuels could shrink by as much as one-third relative to current levels. Shrinking demand means no need to extract more expensive oil and the balance price far below the level assumed in the scenarios of rising demand.
The future of oil largely depends on how long it will retain its dominant position as the primary fuel source for transport. The world today consumes 96 million barrels of crude oil and liquid fuels each day. The largest demand is generated by the transport industry, which accounts for over half of global consumption. Demand from the industrial sector as the second largest consumer is three times lower. What should be noted is the extent of modern transport’s dependence on oil, which powers 90 percent of the industry. Central to electric mobility are light-duty vehicles (LDV), which consume 63 percent (out of that 90 percent) of total crude oil and liquid fuels used in transport (34 mmbd). The largest proportion of LDVs are passenger cars, which account for 35 percent of oil and liquid fuels consumption in the transport sector (19 mmbd). This category of vehicles, consuming a fifth of global oil output, is most heavily influenced by consumers and their transport choices, thus being the most likely electrification and digitisation target. Electrification is the replacement of cars with traditional combustion engines with vehicles powered by an electric power train. Digitisation can amplify the effect of that process by changing the behaviours and habits of consumers: a shift from car ownership to rental and sharing will reduce car travel costs and boost demand for such services.
So, when can we expect a revolution in car transport that will dethrone crude oil as the main fuel? As it turns out, a lot depends on the car makers who, like American Tesla, have taken matters into their own hands and are planning to build a network of fast-charging stations along Europe’s motorways. The global car fleet totalled 900 million vehicles in 2015, including 1.2 million hybrids and electric vehicles. Battery electric cars (BEVs) were 680,000. Due to the long service life of a passenger vehicle, averaging 20 years, roughly 5 percent of the fleet is replaced every year. Considering the pace of growth in global fleet numbers and EV penetration, the share of electric cars in the global fleet in 2030–2035 is all but impressive. According to BP’s estimates, it will be some 6 percent, contributing no more than 1.2 mmbd to oil demand reduction. Nothing to worry about yet.
However, if we do not look far enough ahead, we may fail to notice a potential threat. Scenarios that look out farther into the future show that electric cars may account for nearly 70 percent of the global passenger car fleet in 2050, and global oil demand may decline by more than 24 mmbd, or 30 percent of its current level. The pace of transition is thus expected to accelerate later in the future as the revolution is also having an impact on the demand side of the market, determining which primary energy sources we choose and how we use energy. This mega trend of electrification based on renewable energy sources naturally includes electric mobility.
Dieter Helm, a British economist and specialist on changes in the global energy sector, in his latest book under a telling title ‘Burn Out - The Endgame for Fossil Fuels’, argues that the key drivers of change, that will increase the share of renewable energy sources in the energy mix, will be technological innovations and business, rather than governments or regulations aimed at combating climate change. This is an important conclusion for economic policies, which may keep these processes under control: innovation support tools will play a greater role in building low-carbon economies than instruments for environmental and climate protection.
What will happen next with oil? Its future is not under threat. Instead of being used as a fuel for car engines, more and more oil will be refined into petrochemical and chemical products which are essential to the world’s growth.