Electric vehicle sales are growing faster than expected around the world, and, sales of gas- and diesel-powered vehicles have been falling. Yet, the U.S. government still forecasts an increasing demand for oil, and the oil industry is doubling down on production plans.
Why is that, and what happens if the U.S. projections for growing oil demand are wrong?
On Sept. 12, 2023, Fatih Birol, director of the International Energy Agency, an intergovernmental organization that advises the world’s major economies, drew global attention when he wrote in the Financial Times that the IEA is now projecting a global peak in demand for oil, gas and coal by 2030.
The new date was a significant leap forward in time compared with previous estimates that the peak would not be until the 2030s for oil and even later for gas. It also stood out because the IEA has typically been quite conservative in modeling changes to the global energy system.
Birol pointed to changes in energy policies and a faster-than-expected rise in clean technologies – including electric vehicles – along with Europe’s shift away from fossil fuels amid Russia’s war in Ukraine as the primary reasons. He wrote that the IEA’s upcoming World Energy Outlook “shows the world is on the cusp of a historic turning point.”
EV sales have been growing quickly, particularly in China. China’s BYD produces several of the top-selling models globally. VCG/VCG via Getty Images
The United Nations also released its “global stocktake” report in early September, assessing the world’s progress toward meeting the Paris climate agreement goals of limiting global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) compared with preindustrial temperatures. The report found serious gaps in efforts to reduce greenhouse gas emissions to net-zero by soon after mid-century. However, it noted two bright spots: The world is more or less on track in the growth in solar photovoltaics for renewable energy – and in the growth of electric vehicles.
The dynamics of EV expansion are important because each vehicle that uses electricity instead of gasoline or diesel fuel will depress demand for oil. Even though demand for petroleum products in other sectors, like aviation and petrochemicals, is still increasing, the IEA expects a decline in road transportation’s 50% share of oil consumption to drive an overall peak in demand within a few years.
EVs are now on pace to dominate global car sales by 2030, with fast growth in China in particular, according to analysts at the Rocky Mountain Institute. If countries continue to upgrade their electricity and charging infrastructure, “the endgame for one quarter of global oil demand will be in sight,” they wrote in a new report. As electric trucks become more common, oil demand will likely drop even faster, the analysts wrote.
Based on the data, it appears that global oil demand will peak relatively soon. Yet, major oil companies say they plan to increase their production, and the U.S. Energy Information Administrationstill projects that global demand for oil and fossil fuels will continue to grow.
It’s fair to assume that large industries should have a good handle on future developments expected to affect their fields. But they often have a competing priority to ensure that short-term gains are preserved.
Both Shell and BP recently backpedaled on their previous climate commitments in spite of tacit admissions that increasing oil production is inconsistent with climate change mitigation. Exxon’s CEO said in June 2023 that his company aimed to double its U.S. shale oil production over the next five years.
In 2020, then-BP CEO Bernard Looney declared that the oil company would achieve net-zero carbon emissions by 2050. In 2023, after record profits, BP announced it would increase fossil fuel production investment by about $1 billion a year for the rest of the decade. Daniel Leal/AFP via Getty Images
What is happening in the fossil fuel industry seems to be an example of the so-called “green paradox,” in which it is rational, from a profit-maximization point of view, to extract these resources as quickly as possible when faced with the threat of future decreased market value.
That is, if a company can see that in the future its product will make less money or be threatened by environmental policies, it would be likely to sell as much as possible now. As part of that process, it may be very willing to encourage the building of fossil fuel infrastructure that clearly won’t be viable a decade or two in the future, creating what are known as stranded assets.
In the long run, countries encouraged to borrow to make these investments may be stuck with the bill, in addition to the global climate change impacts that will result.
Extractive industries have known about climate change for decades. But rather than transform themselves into broad-based energy companies, most have doubled down on oil, coal and natural gas. More than two dozen U.S. cities, counties and states are now suing fossil fuel companies over the harms caused by climate change and accusing them of misleading the public, with California filing the latest lawsuit on Sept. 15, 2023.
The question is whether these companies will be able to successfully adapt to a renewable energy world, or whether they will follow the path of U.S. coal companies and not recognize their own decline until it is too late.
Robert Brecha is also affiliated with Climate Analytics, a global non-profit climate science and policy institute. Opinions and ideas expressed in this article do not necessarily reflect those of the University of Dayton or Climate Analytics.
Electric vehicle sales are growing faster than expected around the world, and, sales of gas- and diesel-powered vehicles have been falling. Yet, the U.S. government still forecasts an increasing demand for oil, and the oil industry is doubling down on production plans.
Why is that, and what happens if the U.S. projections for growing oil demand are wrong?
On Sept. 12, 2023, Fatih Birol, director of the International Energy Agency, an intergovernmental organization that advises the world’s major economies, drew global attention when he wrote in the Financial Times that the IEA is now projecting a global peak in demand for oil, gas and coal by 2030.
The new date was a significant leap forward in time compared with previous estimates that the peak would not be until the 2030s for oil and even later for gas. It also stood out because the IEA has typically been quite conservative in modeling changes to the global energy system.
Birol pointed to changes in energy policies and a faster-than-expected rise in clean technologies – including electric vehicles – along with Europe’s shift away from fossil fuels amid Russia’s war in Ukraine as the primary reasons. He wrote that the IEA’s upcoming World Energy Outlook “shows the world is on the cusp of a historic turning point.”
EV sales have been growing quickly, particularly in China. China’s BYD produces several of the top-selling models globally. VCG/VCG via Getty Images
The United Nations also released its “global stocktake” report in early September, assessing the world’s progress toward meeting the Paris climate agreement goals of limiting global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) compared with preindustrial temperatures. The report found serious gaps in efforts to reduce greenhouse gas emissions to net-zero by soon after mid-century. However, it noted two bright spots: The world is more or less on track in the growth in solar photovoltaics for renewable energy – and in the growth of electric vehicles.
The dynamics of EV expansion are important because each vehicle that uses electricity instead of gasoline or diesel fuel will depress demand for oil. Even though demand for petroleum products in other sectors, like aviation and petrochemicals, is still increasing, the IEA expects a decline in road transportation’s 50% share of oil consumption to drive an overall peak in demand within a few years.
EVs are now on pace to dominate global car sales by 2030, with fast growth in China in particular, according to analysts at the Rocky Mountain Institute. If countries continue to upgrade their electricity and charging infrastructure, “the endgame for one quarter of global oil demand will be in sight,” they wrote in a new report. As electric trucks become more common, oil demand will likely drop even faster, the analysts wrote.
Based on the data, it appears that global oil demand will peak relatively soon. Yet, major oil companies say they plan to increase their production, and the U.S. Energy Information Administrationstill projects that global demand for oil and fossil fuels will continue to grow.
It’s fair to assume that large industries should have a good handle on future developments expected to affect their fields. But they often have a competing priority to ensure that short-term gains are preserved.
Both Shell and BP recently backpedaled on their previous climate commitments in spite of tacit admissions that increasing oil production is inconsistent with climate change mitigation. Exxon’s CEO said in June 2023 that his company aimed to double its U.S. shale oil production over the next five years.
In 2020, then-BP CEO Bernard Looney declared that the oil company would achieve net-zero carbon emissions by 2050. In 2023, after record profits, BP announced it would increase fossil fuel production investment by about $1 billion a year for the rest of the decade. Daniel Leal/AFP via Getty Images
What is happening in the fossil fuel industry seems to be an example of the so-called “green paradox,” in which it is rational, from a profit-maximization point of view, to extract these resources as quickly as possible when faced with the threat of future decreased market value.
That is, if a company can see that in the future its product will make less money or be threatened by environmental policies, it would be likely to sell as much as possible now. As part of that process, it may be very willing to encourage the building of fossil fuel infrastructure that clearly won’t be viable a decade or two in the future, creating what are known as stranded assets.
In the long run, countries encouraged to borrow to make these investments may be stuck with the bill, in addition to the global climate change impacts that will result.
Extractive industries have known about climate change for decades. But rather than transform themselves into broad-based energy companies, most have doubled down on oil, coal and natural gas. More than two dozen U.S. cities, counties and states are now suing fossil fuel companies over the harms caused by climate change and accusing them of misleading the public, with California filing the latest lawsuit on Sept. 15, 2023.
The question is whether these companies will be able to successfully adapt to a renewable energy world, or whether they will follow the path of U.S. coal companies and not recognize their own decline until it is too late.
Robert Brecha is also affiliated with Climate Analytics, a global non-profit climate science and policy institute. Opinions and ideas expressed in this article do not necessarily reflect those of the University of Dayton or Climate Analytics.
