Oil Demand for Transport: Stronger for Longer

And there's a really interesting report that we're going to talk about today which is the twenty nineteen Road Fuel Outlook. So we're going to be joined by David Doherty, who's actually an analyst that looks at oiled Man specifically, and he's going to tell us this. So what in the Electric Vehicle Outlook? I think one of the one of the biggest punch lines. So let's let's talk a little bit about vehicles. So, Mark, do you have car? I

sadly do not, well, not anymore. I live in the middle of London and I frankly don't need one, but you know what, I want one? Yeah, if I were to buy one, I would buy an electric vehicle. But last night, actually I was just sitting there in my flat and my wife says, you know what, I want to buy a Classic Mini, like a Ni Mini, like a Maximni now in pink. So from having no car to wanting an electric vehicle to possibly going back and buying an old Classic that is not efficient by any means.

So I've got a Mini, but I've got a Maxim Many and Many Country. It's a plug in hybrid, and so I'm loving it. First of all, I'm loving charging it and the parking. Do you feel like you're part of the future. I feel like I'm stepping into the future. I feel like the interface inside the car is cool, the outside of his cool, and plugging in my car

is cool. You know. Instantly, we actually we had a roundtable event with some people working in financial services around the electric vehicle outlook, and there are all these really fascinating questions, and you know, we liaise with people across all parts of the BYE side, and you know, some people in vcs. We're looking at some really cool technology and I can't help getting swept up into is up in all of it, thinking we're stepping into the future.

This is so incredibly cool. It is cool cool. We're talking about transitions, energy transition, the electric vehicle transition, inflection points, yes, peaks and all of this stuff to this report really real. Yeah, it brings it home. You know, not to give everything away because David Doherty is going to give you a much better view on all of this. But ultimately, there's a future for oil, and there's a there's a future

for CEO two and electric vehicles. They're going to disrupt things and provide opportunities and force companies to think a little bit differently. But the future in some regards looks somewhat like today if does not provide investment and strategy advice. And you can hear the full disclaimer at the end of the show you're listening to switch it on. This is Dana Perkins and I'm Mark Taylor and we are joined here today by David Doherty. Welcome David, thank you,

thanks for joining us today. Can you tell us what the one thing is that people should remember from this report? The one thing that people should take from this report is, regardless of how many electric vehicles, electric chooks, alternative cleaner fuel as we add, we still end up where we are today in terms of carbon emissions from road transport,

I think that's a big one thing. I think people sit there and we have this assumption that if we have a lot more electric vehicles on the road, that's going to drive carbon emissions down and probably oil demand down. You're an oil demand analyst, So where are you seeing this really develop? Yeah? I mean the problem is not so much in the markets we tend to sit in the US, Europe and China, for instance. That's where we

see e vs and alternatives really taking off. That's where fuel economy regulations are pretty stringent, pretty strict in Europe for instance. And the problem is in developing world where they take our second hand cars where they don't have mobility today, so they want mobility tomorrow, and that's the demand that comes onto that pile. So it's so quick this demand growth that regardless of what we're adding into

this pile, we're not catching up with it. So we end up in twenty forty where we are today in terms of overall oil consumption from passenger cars and from commercial trucks. And that is really the crux of this whole thing. Add add these clean vehicles, but demand just outpaces everything. But a really report I came away with three things. Really to me, the whole thing said, there's gonna be a lot more people. People want to get places, and people want more stuff. Right. Does that sound like

too broader generalization or does that sound no? I think it's pretty fair. And I mean it's run a high horse sitting here in London, and we can say we need cleaner air, we need cleaner fuels, we need a nice electric vehicle. But getting from A to B is a necessity for some people that they don't mind what it pops at the back of that tail pipe. If you're talking about like a Western African nation, mobility is

what they want. You have to be rich enough to really care about the air that you're breeding in if you can't get around, right, So you don't want to take that mobility away from somebody, and you want to give them the opportunity to get it. How do we do that in the cleanest way? That is really the question we haven't really answered. It's um, it's it's a bit of a double edged sword, right. People want this, They want more stuff, like you said, want more miles.

They want to be able to do things that we can do, and we sit here saying, well, actually, you know the air is a bit dirty. I got a chest infection from that diesel, like the sut that comes out of the car. You have to be rich enough to care about that sort of thing. If you you know, we can get around. If you can't, you don't. You don't care if it's gasoline, if it's diesel, or it's the tank, you're going to move around well. So this

is where governments come into play. And one of the things that you point out in this report is that fuel economy standards actually have a more meaningful impact in some parts of the vehicle chain than others. Can you extrapolate on that a little bit? So we talk a lot about different technologies, electric hydrogen, they don't really play a role until they past, at least not in big numbers. So how do you tackle that in the next ten years thirty? The easiest way is the fuel economy regulations.

So the fuel economy is how much oil your car burns to travel one mile um And the way governments are regulated in Europe, US and China basically is say the average car that you sell has to have x of a fuel economy improvement by a certain date. So you could sell electric vehicles and one tank that just consumes tons and tons of reesel. Once the average works out at a certain amount, then you're good to go.

And so that's where we're seeing electric vehicles being the answer at the moment to like the false wagons of the world. And we saw FEAT buying the credits that TSLT produced from their electric vehicles, so they can meet that hurdle. But fuel economy standards are are the one that really hit oil demand in the short term, and

they're the easiest to put into place. They come at a cost to the auto manufacturer, which in turn gets passed on really to the to the client at the end of the day, me and you're driving our cars. But it's the quickest one that you can do, and if you look in terms of emissions, it's the first one that makes a dent in that in that big stack of emissions. So they're the easiest one to put into place if you're a government theoretically, but if you're

an auto manufacturer, I would assume this is pretty tough. Um. You can hear from my accent, I'm American. We recently in the US decided to roll some of those back in the future. What does that potentially do to this forecast. Does it does it make it fluctuate wildly? Things change,

It's a big risk. So if you were, like in the US, going to flatten your fuel economy, regulate some say so just say over those four years freeze you don't need to improve anything in the US alone, that would add about five thousand barrels per day half a million barrels per day. That's about the point five of total consumption as we stand back into that pool. So it's very sensitive to these things. And you have to

think as well. If an electric vehicle comes onto the road, the way you've got to think about it is it's replacing what would have been an ice vehicle, combustion engine vehicle. So the efficiency of that combustion engine vehicle really matters when we're thinking about how much are these electric vehicles actually displacing in the world. You know, if it's a less efficient vehicle, that that ev displacement number looks pretty high. Really,

it's still displacing the similar mile. It's just that mile consumes more oil um. So that is probably the biggest, the biggest swing in any of these forecasts. What what is that mile consuming? You know, how much gasoline, how much diesel, and people can change their mind. You know, Trump came in, we saw that they try to roll that back where they frozen for now, it's a little bit in limbo at the moment, Europe get more stringent. We saw during the week Japan released news that they

were going to introduce a new one. These are people sitting in rooms making decisions. They're not people on a you know, a manufacturing line making the car. They have to react to these politicians and this policy that comes into play, but it is the most efficient, quickest way to do it. So is that the main I don't know, load bearing assumption in the report, so the government regulations or is it uptake from emerging markets or elsewhere? Yeah,

it's a bit of boat to be honest. So in the developing markets, I would say that the biggest dependency for this, what could really swing that number, would be the fuel economy. You assume that the car holds because we're looking at markets that are essentially flat, and actually what you're more concerned about now is what does uber do to that market? So if us three are going somewhere, what if we shared that car instead of all three of us driving our cars. That's three for one, right.

That's very different to in Africa, where somebody might cycle or they might take a bus, and they're probably going the opposite direction. They want their own vehicle, they want their own space, and they want to move that male themselves. So it's two very different things. You have a bit of crossover in the likes of say India, where we think sharing where it's more normal there to share in the first place, will be um key to answering that

demand and that mobility growth. So it's very different and very different regions, so you kind of can't put them all in the same box. But absolutely the developing world, where the population makes us look tiny, is really where the growth comes from. In both the trucks and passenger cars. We make an assumption in here around autonomous driving and that that is going to essentially reach a tipping point in the technology that doesn't quite exist yet. We're just

assuming it's going to be there. So my kids, are they going to grow up they can have a driver's license. Are they all going to be and shared autonomously driven vehicles? Yeah, it's I mean, it's it's hard to know. It's one of those things where you can make a best gas at But what actually happens we will, you know, have to wait and see. But that robot taxi is, so to speak, which is quite a terrifying where are being tested out. We're seeing them on the roads in California.

But they are on the roads in California, which even from London seems a mile away. You know, you're you're not quite connected to how that works. And can I see myself driving around with a robot actually behind the wheel? I don't know. You've got to change mentalities, and I would like to think I'm probably on the forefront of being okay with these things, but not proven in my head. But in our forecast in the later part of the ties, yeah,

we see that playing more of a role. The interesting part of that is by that time, the more you drive, the cheaper it is to drive on an electric mile. So they will all be electric. They might use more electricity, but they will be electric. They won't be running off of diesel. You know, your robot is not going to pull into a station and refill their engine. You know it's but isn't the same thing for the right sharing companies? I saw in the report it said that you're still

going to have ice vehicles like scuber and lift. I didn't quite believe that. Yeah, for sure, I mean the logic makes sense to shift to electric. So basically, the more you drive, the more miles you cover, the better the payback period is what I think. What's really interesting in the shared hailed services is in the short term

it adds into the pile. So we've seen London, New York where they're really actually now worried about congestion because maybe on a night out I would have previously got a bus home or the night to I am not getting that anymore. I'm most definitely getting an uber And if you really want to skimp on pennies, you'll do an uber pool. Like you know, it's it's totally different way of thinking. That adds back into consumption. So our forecast builds that into the short term, actually adds into

the oil pool. Further out it dips off. Yeah, absolutely, But then you shift into different parts of the world where infrastructure can become a problem or actually that competitiveness, the price competitiveness becomes an issue because ice vehicles and certain regions are incredibly cheap. India, for instance, electric vehicles really struggle to compete because cars there are incredibly cheap. So you're you're not you know, you've moved the goalposts

in different markets. You're looking at in a very different way. Yeah, okay, So in here we say that peak demand for oil for light and heavy duty vehicles peaks in. But I looked at the chart and it didn't look very peaky. If you will, It looks like the sort of you know, mountain I want to climb when I go on a country walk on the weekend. So how far have we gone out into the future and do we see a

drop off at any time? Or is it really looking like business as usual into the future as far as we can tell, well, the story diverges massively between passenger cars and heavy duty vehicles. Right, So if you're looking at me and you driving around, we have alternative options. We've got different drive trains coming along. We've got different solutions like uber, like lift, like that robot cab that might bring us around. When it comes to trucks, you're

in a very different field of things. You're you're looking at how heavy is that truck? A truck works off of putting things in the back and transporting them. If you've got a huge battery, you can't put more things on the back of it because you're regulated into how heavy your truck can be. In general, if you're in a city center, however, you may not allowd be using be allowed to use diesel anymore. You can only use

electric or something clean. So the trucking market itself is just a whole other things, six or seven different markets. You have to think about them in a very different way. Passenger cars is easy that peaks pretty early I think in our forecast, and comes off afterwards. It doesn't totally nos dive, but the whole time, trucks continue to grow until twenty thirty five and slow down afterwards, but it's a very minimal slowdown, which is what causes that sort

of flattening out. Like you said, the mountain you want to climb in the weekend sort of thing. So you can't look at them. You look at them together, but it's difficult to really understand the story unless you really pick them apart and look at what's happening in each of them. And our house view tends not to favor hybrids, but it seems like there's really a place for hybrids or range extenders or plug ins, or something that's halfway between in this truck's space. Yeah, I mean hybrids in

general are expensive to make. So if you think about it, you've got the expensive parts of an ice engine mixed with the expensive parts of an electric and I mean you're putting two expensive things. You don't get anything that's any cheaper. However, in the trucking space, it comes down to function. Yet again, you might not have the infrastructure to refuel if you've got a truck doesn't have a

set route. Let's say you might be going from Edinburgh to London one day, you could be going from the middle of Poland to the middle of German You another day. So you need to know where infrastructure lies in advance. So that's where things like range extenders you could think of as a sort of a plug in hybrid, come

into play. You can drive some of your miles electric, but ultimately it's the diesel that recharges that engine and then when it's recharge switches to that So there is a role to play, but it's not as simple as thinking of a plug in hybrid electric vehicle versus you know, a battery electric vehicle. It's a it's a completely different way of thinking about it. It's more through function for trucks than it is basic costs. You know, a car is a car, so to speak. You can drive longer

or shorter. You tend to drive the same way. Trucks. You've got weight limitations, some technologies you can turn the corner for correctly. If you have, you know, a big fuel cell stack in the back of your truck, you can you can only angle so much around corners. There's a lot of things you have to think about when you're looking at the trucking market that before we did

this research, I never ever thought about. So with these fuels that we're still going to see demand for in the future, can you break them down a little bit by gasoline and diesel because those have two very different demand profiles, don't they. Yeah, So the passenger car market is almost exclusively asoline now and we see diesel in Europe. Diesel has really had a hard time recently. There's been

the Volkswagen scandal, it's fallen out of favor. You could clean diesel up now and it's still not going to sell the way it has. We've seen the likes of Renault abandoned the technology and smaller vehicles. It's just too expensive to make smaller cars or diesels now because the margins or something, so they're shifting away from that. So when Europe is sort of the only place using diesel, it makes sense for them to sort of conform to

the rest of the world. And we're seeing lots of other uses for diesel trucking which is growing, so in theory the price of diesels should go up, but also shipping where they're shifting towards a cleaner fuel such as diesel. Right, So the passenger car segment is a gasoline market, which is why that peaks before diesel, and diesel is predominantly

used in trucks. The only place you see gasoline and trucks is sort of the lighter vans, so you know, Amazon delivery services, they may run off of gasoline, particularly in the US in Europe pretends to be diesel, but the diesel profile is much stronger and more resilient in terms of, you know, susceptible to disruption than gasoline, so we see diesel peaking into any early five. Benefit of that, however, is diesel is much more efficient on a mile paramount

basis than than gasoline. So it's carbon profile is I would say favorable to gasoline. You just need to manage the NOx and socks, the emissions and the air quality issues that come from back of it. Have you looked at what this means for I don't know. Strategies for oil companies say yeah, they have to think about how

they approach is a very different way in future. At the moment, we have a huge refining system in the U S which produces an awful lot of gasoline, a big refining system in Europe which produces an awful lot of diesel, and that suits it at the moment. So Europe consumes diesel in its passenger cars, also in its trucks. The U S consumes a lot of gasoline in its cars right. What they have extra they export to Latin America or to Africa. Europe exports gasoline to Latin America

or to West Africa. We're seeing now big refining projects coming into the places that we've always used to send our excess capacity, to our excess products to. So West Africa, for instance, they've got a huge refinery that don go to refinery that's being built to satisfy that gasoline demand. That is just one example of what we're seeing happening. China is doing the same, Southeast Asia, Middle East. These developing markets or developing markets quote unquote are satisfying their

own demand now satisfying their own supply. So if you're pumping out aasoline in Europe or the US, you now have to compete when you're trying to price that into those markets, So your whole strategy has to change. The one thing I would say is the oil market is totally used to this. You know, we have big shifts and standards. We've always had big shifts in inspecs, and they're not afraid to move things around. We've got the I m O coming up next year, for instance. We'll

see products shift around. We've already seen it happen before when diesel spects come into play. Um of the industry. It's incredibly flexible and I don't think people give it a lot of credit and how they can adapt to these changing markets. So in all this, who do I want to be? Do I want to be a truck and company in India? Do I want to be an oil company? Do I want to be an automo? Manufacturer. Who do I want to be. Yeah, that's quite a tough question. Everybody, I think can take value out of

this in a certain way. Where I think the biggest opening up in terms of value will be is auto manufacturers or truck manufacturers. Particularly if you think of a truck and company. Now, they sell their truck to somebody who's going to use it, and that person who's going to use it parks it fills it with diesel every day, right, Okay, so they have like an ongoing cost for the lifetime of that truck. If I am a truck manufacturer, I want to sell them something that might be more expensive

today but with cheaper running costs. So as a truck manufacturer, I have locked in more of that value that I'm going to get from that person. So that's basically shifting from the oil value chain into the auto manufacturing chain. But you have that higher upfront cost. Right. Trucking companies are I wouldn't say cash rich, right. They don't have deep pockets credits probably an issue. They tend to be quite small. The average size is something like ten in

their fleet. That's pretty small. You're not talking about, you know, piano ferries, the very different landscape. But with some smart instruments, which we've already in the electric bus market for instance, you can basically enter into swaps. So you may have that truck manufacturer enters into a swap with its customer, so basically they pay a lower upfront costs, but then what they would have spent on diesel they give to

the auto manufacture across the lifetime of that truck. That to me is really where it gets interesting, and that's where banks will will, you know, eventually get involved that the balance sheet of automakers may not necessarily need to be used, but they're already banks. False wagon have a bank, so they're set up to think about this, and that would be an obvious, an obvious way for me to make money if I was a truckmaker. And oil companies I think will make money regardless because they match up

supply with demand. They own the ships in between. Um yeah, like I said, the demand profile changes in terms of location, the amount is still there. They'll just compete and the bigger guys will be much better at place to compete than the smaller guys. What's next to this line of research? We want to have a look at bio fuels. So what we've discovered from this one is regardless of how fast you run, how many electric vehicles or alternative fuels you put into that system, we can't get to cleaning

up the road fuel sector. So what could you do otherwise what we currently have? So we're gonna look at bio fuels for one, is a clean wave of approaching it, and also how you may be able to change the speck of what we currently use. So gasoline at the moment we have ninety two run normally maybe ninety five. You can clean up gasoline so to speak. To make it into Layman's terms, is there a renaissance coming from biofuels. There has to be something, So we're gonna check it out. Yeah, yeah,

I'm not promising anything. We haven't started it yet. But then there will be a role for sure. Okay, and there already is a role in the US where it's maybe ten percent of consumption. Ye, Brazil is like twenty seven percent, China is mandated twenty I think, or maybe ten percent from Yeah, there'll be a role. What kind of bio fuels TBD David, thanks for joining us, no problem, Thank you for having me Bloomberg Any app is a

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