EV Adoption Will Shake Global Oil

January 11, 2022

Discovered analyst Gregor Macdonald yesterday and sub’d to his newsletter. He seems spot on to me.
We are in for a bumpy ride during this transition, but just about all the dynamics push us in the direction of more renewable deployment.
A lot of talk out there about inflation, particularly for energy – and a big wild card will be how quickly EV adoption proceeds. Macdonald argues that EVs are now firmly on the upward sweep of the “S” curve.(see above)
Commentators who blame the renewable transition for recent spikes in oil prices are off base. New oil drilling has been down since oil prices fell off a cliff in 2014, and especially during the Covid shutdown – but opening up new supplies takes most of a decade. Not credible that short term spike of the last 6 months is due to some sudden capitulation on the part of drillers and frackers.

Gregor Macdonald on Twitter:

Let’s play the superlative game: the biggest story in global climate is unfolding in real time right now in China’s EV market which is absolutely off the hook. EV (NEV) sales are headed towards 3 million this year, as ICE sales get absolutely crushed.

In my latest newsletter I showed that after ICE sales peaked at 28.1 million units in 2017, China’s road fuel demand stopped growing. While we can’t count on fuel demand to stay flat (on-road ICE fleet in China is mighty) ICE sales are on course to be < 22 million this year.

Kinda fascinating is that China’s data agencies have started reporting electricity demand from the emerging EV fleet. Counter to people’s intuitions, it’s not much. But it’s not nothing. 3 million EV hitting the road in 2021 places roughly 10 TWh of new demand on the grid.

Let’s place that in context. China generated 7780 TWh of power in 2020. And as I tirelessly point out, China creates so much new power each year from *wind and solar alone* that it overwhelmingly covers new EV demand. 2020: 61 TWh from *new* wind. 37 TWh from *new* solar.

But what’s unfolding right now in China’s car market is far closer to some of the heady forecasts from a couple years back, that at the time just seemed dreamy and wishful. 3 million NEV sales in a 25 million unit market already, in 2021? That is absolutely brutal for oil.

Care to make a guess where we’re headed, with EV starting to blow past 10% market share in China? How about 7 million EV sales in a 28 million unit market during 2025? Through the lever of petroleum product demand, what is the signal to oil markets from this point forward?

As for oil, I embrace the truth that prices are set at the margin, whether you like it or not. That said, the world was a 100 mbpd oil market in 2019, will come in at best at 97 mbpd this year. If OPEC spare capacity is at 7 mbpd (EIA) sorry, there is no structural oil shortage.

Something folks may not know about me: I used to be an oil market trader 2002-2008. My entire edge was trading against the hatred of higher oil prices, because I knew, and was correct, there was a structural shortage problem. A multi-year problem. What do I see now?

I have never seen the global oil market in its current position: a really scary house of cards, with enormous spare capacity held by OPEC, and “turn it on” flexibility outside of OPEC. And all this is shrouded currently in logistical delivery issues, and high prices.

We are therefore exiting the period when early EV adoption globally was unable to have much of an effect on oil demand. Exiting quickly now, more quickly than can be easily absorbed or accepted–to a new domain where EV are like a WTF? Viking Raid on ICE, and oil.

I produced this recent Yale Climate Connections video in anticipation that the current European energy crunch, like the Texas blackout of last year, would be blamed on the energy transition, instead of poor planning, or in the case of Europe, Russian weaponization of fossil gas.

2 Responses to “EV Adoption Will Shake Global Oil”

  1. jimbills Says:

    I’ve been reading that the oil companies have been so used to losing money the last couple of years that they are hesitant right now to spend on new drilling – that they’re reaping the profits in the short term to pay off investors.

    Macdonald isn’t saying so much that we’re suddenly going to get rid of oil (like Seba does). He’s instead saying that peak oil supply is no longer a concern (as it was in 2002-2008), but that peak oil demand is likely to happen in a few years. He mentions that global oil demand may increase in the near-term, and that the on-road ICE fleet is significant.

    On oil prices in the future (next 20 years), I’d say volatility is a safe bet. Lower oil demand will create lower investment, which will then result in higher short-term oil prices as supply hits current demand levels, which will eventually create newer investment, which will later lower oil prices as the new supply runs into lower demand, and the cycle will continue.


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