One of the more frequent questions we have been asked of late is whether the rise in crude oil prices toward $80 per barrel will “kill demand,” as a number of pundits have asserted. We have faced this same question on numerous occasions over the past two decades, and the short answer has remained “no.” Our view relates to the simple fact that global oil consumption has become perfectly inelastic, a perspective that clearly runs counter to what most believe (or want to believe). To gain an appreciation of this, one must start by looking back almost five decades.
During the 1970s, oil used for space heating and electric power generation accounted for about 31 percent of world oil demand. The oil price rises that occurred in the 1970s did indeed foment a substitution effect. Between 1979 and 1983, global oil consumption contracted by 10 percent (or by about 6 million barrels per day) as coal, nuclear power and natural gas were substituted for oil-based fuels. As time marched on, though, petroleum consumption became dominated by transportation uses (now about 74 percent of world demand) and for various petrochemicals (which represent about 24 percent of usage).
These categories of consumption are the principal reason for the perfect inelasticity of oil demand. Anyone that studied microeconomics was taught that a commodity’s price elasticity has a negative coefficient, that is, as the price of a good rises the demand for that good will fall. In the case of petroleum, crude prices between 2000 and 2019 rose 283 percent and oil demand grew 33 percent.
Enter the pressures from pension funds that have environmental, social and governance mandates. While it is difficult to find an individual that does not think a healthier environment is a worthwhile goal, we have witnessed an almost religious fanaticism develop toward a belief that electric vehicles (EVs) will result in the “death of oil.” This is not a view we subscribe to.
A key energy security study that examined the potential demand for EVs projected a global fleet size of about 100 million such cars in the coming 20 years (the current EV fleet size is 7.5 million). The global auto fleet currently totals about 1.3 billion cars. We are compelled to note that the projected EV penetration rate of that study assumed significant advances in battery technology and an almost magical elimination of issues related to the rare earth metals needed for EVs.
Last but not least, the projected 100 million EV fleet size presumed that battery disposal issues would somehow be resolved. We will leave out the ironical (but hardly inconsequential) need for expanded coal-fired power generation to provide electricity for those EVs.
So, assuming all of that and for the sake of argument, let us employ an even more aggressive sales rate that results in double that projected gain of EVs during this time horizon. Over the same 20 year period, however, the growth in the number of petrol-powered autos is projected to expand by an additional 400 million vehicles. Think about that math and ask yourself if it sounds like the death of oil to you…
