This year, the worldwide desire for oil is expected to hit an all-time high, with purchases increasing by about 40%. Battery electric vehicle (BEV) adoption, predicted to account for more than 10% of worldwide car sales, has not reduced oil use.
According to a Morgan Stanley analysis, the disparity between the surge in electric car sales and growing oil consumption defies common wisdom.
Norway, which has the highest EV penetration rate in the world, is a fascinating case study. Even though EVs account for 80% of new car sales, the country’s oil use has not decreased.
Similar patterns may be seen in China, the world’s biggest EV market, where oil consumption has increased by 50% while EV penetration has surpassed 20%. Many people ignore the reality that road transportation accounts for less than half of world oil use.
Contrary to common opinion, road transportation accounts for just a portion of total oil use. Jet fuel, petrochemicals, and industrial/residential heating all play an important role in world oil consumption.
According to the International Energy Agency (IEA), the petrochemical industry will be the key driver of future oil consumption. Demand for jet fuel is also likely to rise as airline traffic returns to pre-pandemic levels.
Energy transitions take decades, and historical evidence shows that new technologies require time to gain supremacy.
Currently, fossil fuels account for more than 80% of primary energy consumption, with solar and wind accounting for just over 5%.
Government measures supporting net-zero emissions and using cost-effective renewables will progressively change this equilibrium.
While oil’s proportion in the energy mix has shrunk from 40% in 1965 to less than a third now, total energy consumption has more than quadrupled.
Predictions of a drop in oil demand are seen as too pessimistic. Global oil consumption is on course to set new highs by the end of the year, thanks to faster-than-expected global GDP growth and increased demand for aviation fuel.
OPEC and Russia, among other major oil producers, have reacted warily to growing demand. Underinvestment in oil production is a major worry since worldwide capital spending for exploration has been cut in half from its high in 2014 to less than USD 400 billion in 2022.
If investment levels do not improve, the International Energy Agency (IEA) warns of probable global oil supply deficits by 2030.
Oil prices have historically fluctuated between the marginal cost of additional production and the cost of demand destruction. Energy shares, although inexpensively priced, confront investor skepticism, with their proportion of global equity market capitalization falling.
The industry’s transition toward a more investor-friendly capital allocation strategy and high normalized free cash-flow returns promises significant potential benefits, especially provided businesses maintain capital discipline in an oil-price scenario.
While the energy shift has begun, a dramatic decrease in oil consumption looks to be a long way off. Current investment levels fall short of matching projected oil demand growth, indicating an attractive outlook for energy stocks under “tighter for longer” oil market circumstances.