The Energy Transition is Amongst Us: UK Road Fuel Demand Peaks

 

The energy transition is accelerating: as predicted, the use of fossil fuels in UK transport has reached a peak, and is now in permanent decline. The forecast here indicates a decrease of 1 billion litres per year through 2025, and 2 billion litres per year thereafter.

UK fuel taxation policy needs to quickly adapt.

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A Victory for Arithmetic

In January we posted the prediction that 2016 would mark the historic high point in UK gasoline / diesel demand, with 2017 beginning a permanent decline in consumption.

In a victory for arithmetic, what actually occurred is – exactly that.

According to the London Times this week, citing a report from the UK Automobile Association (AA):

“In the first eight months of this year 31,164 million litres of petrol and diesel were sold, down from 31,172 million litres in the same period in 2016.”

Importantly, the AA identified that for the first time this was a structural trend – occurring even as traffic numbers and vehicle miles travelled (VMT) grew (vehicles covered a record 325 billion miles to the year ending in June)

“Traffic is increasing but consumption of petrol and diesel has fallen for the first time…There have been falls in demand for road fuel before but only when the total number of miles driven by all vehicles was declining or static because of recession, strikes or sharp increases in pump prices.”

More succinctly, from Edmund King, president of the AA;

“It appears that we have reached a tipping point in the UK when it comes to the consumption of fossil fuels for transport. Our analysis shows that this point has emerged more quickly than most have predicted.”

Well, not on this site.

But anyway, let’s take a minute to review the cornerstones of the analysis we made:
The prediction was based on the fact that UK 2017 car sales were forecast to fall 5% pa overall from 2016’s highs, while Hybrid / EV sales were still likely to grow fast, with increases of 30-40%pa almost certain to continue (albeit from a lowish base.)

In a triumph for near-term predictions, this is more or less what has happened – see here.

Details aside, let’s take a step back to see what has just taken place: in the UK, the consumption of fossil fuels for road transport has peaked.

As the Times put it in their article:

“…vehicles powered by fossil fuel are en route to “joining steam and horse transport in the history books”.”

However, in a twist the UK AA also noted that:

“..there would be a long and slow decline in fossil fuel use in road transport and that it expected it to remain in use in some vehicles until about 2060.”

Here is another prediction: that comment is only half right

Sure, fossil fuels will likely remain dominant in a niche of vehicles in 2060 (you can still buy vinyl records too, we hear) – but the broad use of fossil fuels in the UK will follow a short and sharp decline, not a gentle slope.

Because life is rarely linear.

A Billion Litres Less Fossil Fuel Per Year, Starting Now

Switching from arithmetic to algebra for a minute, we forecast that the fall off in UK fossil fuel usage will be fast and non-linear, following the S-curve equations we have detailed several times before – see here and here.

This is because the move to EVs will become a fashion, a hastening trend and will auto-accelerate – so a smooth, slow reduction in liquid fuel propulsion is unlikely.

The controversy surrounding diesel emissions, the move of high mileage vehicles to hybrid and battery power and the UK policy of phasing out fossil fuel car sales by 2040 will accelerate the current movement, which is already aboard an S curve trajectory.

The particular structure of a car purchase will also bring change forward.

Most cars have 3-4 owners, each owning it for 3-4 years.

Each owner needs to be sure there will be a solid market for re-sale, or a scrappage fee – depreciation is a major lifetime cost element. Anecdotally a new car buyer assumes they lose 20% of the price the moment they drive off the forecourt.

UK purchasers of brand new diesel cars are clearly living this risk: sales of diesel cars in the UK are down 13.7% year on year.

The buyer of a brand new diesel car needs to know that a solid market for re-sale will exist in 2021 – but with an annual sales decrease of almost 14% confidence in a re-sale value will start to evaporate quickly – as it has: sales in the latest month, September, are down almost 22% year on year.

To a lesser extent, the same is true for gasoline sales – up 3% year-on-year, but down 1.3% for the latest month

Conversely, the opposite is happening for EVs / Hybrids – up 35% on a yearly basis, but up 41% for the latest month.

In sum, here is how a general trend is accelerating locally: in 2017 so far, there have been over 135,000 fewer diesel cars sold compared to 2016: gasoline cars have increased modestly by 32,000, but EVs/Hybrids have shot up by 24,000.

In the current month, EVs / Hybrids now command 5.3% market share, up from 3.4% a year ago.

Put another way: the ratio of diesel market share to EV / Hybrid market share in the UK in September 2016 (46.4% to 3.4%) was 13.6x. In September 2017 the ratio (40.1% to 5.3%) is 7.6x.

source: SMMT

At these rates, EV / Hybrid and Diesel sales would reach parity by 2021. It may occur well before then as purchasers today flee the diesel market for fear of the rapidly increasing resale risk.

This data suggests that a sizeable proportion of diesel deserters are moving to their first Hybrid or EV purchase (targeted trade-in schemes for diesel to hybrid are also forcing this trend).

Modelling this is difficult due to the multiple variables, but the chart below shows a scenario based on the current dynamic: an S curve take-off of EVs, and the accelerating fuel economy of all other vehicles as electrification intensifies and standard fuel cars improve to compete (sailing ship effect). We have therefore used 3%pa increase in fuel economy, slightly above the recent average of ca 2.5%pa.

We have also assumed the base rate of VMT continues at 1% pa growth (this may be less due to urbanisation, driverless technology etc), and that overall vehicle sales remain nearly flat (0.5% annual growth)– even though reductions in sales are projected over the next few years. This is essentially the same analysis we used for our earlier prediction.

Finally, we have added a simple model of governmental revenue impact from this major shift in consumption as detailed below.

source: dollarsperbbl analysis (1), SMMT

Analysis beyond 2020-25 is questionable, but the chart highlights at least three key issues:

1- Peak consumption under various scenarios is now behind us – the decline in sales growth, the rise of EVs and the response of fuel efficiency now overwhelms any increases in fuel demand, forcing it down permanently.

2 – The decline will not be smooth and linear, it will be sharp and accelerative –the headline is that the UK will use a billion litres less per year of gasoline and diesel from 2019 until 2025, and 2 billion litres per year thereafter.

By 2025 this equates to a reduction in the UK alone of about 130,000 b/d of gasoline and diesel, so perhaps reducing the call on crude of ca 200,000 b/d alone. Given the UK is about 3% of the global car market, that suggests a bottoms up global reduction of ca 5-7 mb/d of crude by 2025.

3 – The UK treasury will need to start a progressive tax on fossil fuels now to avoid major revenue short-falls – the UK government levies about £0.60/litre ($0.80/litre) or some £28bn pa ($37bn pa) on fossil fuels. A billion litres reduced consumption of these per year equals £600m ($800m) pa less revenue.

The easiest way to fill this gap, before the sharpest decline, is for a progressive 2-3% increase per year on the fuel tax, in line with the 2040 fossil fuel exit policy. It’s a levy that has been frozen for 5 years, but in line with alcohol and tobacco taxes, a move to increase fuel taxation to improve health and spur new energy technology development is at least a  coherent policy.

The energy transition is amongst us – it’s time to react and start developing strategic policies.

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(1) – A copy of the spreadsheet and assumptions used can be provided on request