Oslo and Beijing are Transforming the World of Transport – and Global Oil Demand

Norway’s niche high-growth EV market could be dismissed as a small outlier – were it not for the fact that the world’s largest car market is following its path.

Our Friends in the North

Norway is the world’s fastest growing market for electric vehicles (EVs): in 2017 39% of car sales in the country were pure electric or plug-in hybrid EVs.

If (non-plug-in) hybrids are included, electrified vehicles made up 52% of the 158,000 passenger cars sold Hence, Norway became the first country in the world to sell more electrified cars in a year than traditional internal combustion engine (ICE) vehicles.

source – bestsellingcars blog

This is due in part to the Norwegian government’s target of zero sales of CO2-emitting vehicles by 2025, supported by policies such as tax exemptions and free parking.

If sales of EVs continue to grow at their current 35% pa rate, that target will be reached.

Yet Norway continues to consume more transportation fossil fuels than ever: in 2016, it used a record 3.5 billion litres of gasoline and diesel in its passenger car sector (roughly 46,000 barrels of gasoline and diesel per day, or 0.2% of the world total).

This is why Norway is often seen as interesting but an outlier in the adoption of EVs (a small, heavily-subsidised country). Moreover, the transition away from fossil fuel demand is expected to be via a long, gentle plateau.

A closer look at the data from Norway, and what it means for the global auto and oil industry, suggests that this common wisdom might be wrong on both counts.

For two massive industries there is an awful lot at stake here: the automotive and oil businesses each have annual revenue of around USD 2 trillion. Should automotive firms invest simultaneously in EVs and ICE cars or favour just one technology? Should oil companies assume a long plateau of fleet fuel demand, or a more sudden decline curve?

What does Norway tell us?

Norway’s Peak ICE Sales

The chart below uses current Norwegian car sales data to 2013-17, extrapolated out to 2025 assuming, as per stated government targets, that EVs achieve almost 100% of sales by then (we’ve assumed 95%).

Note: Norway: Total, ICE and EV sales pa – 2013-17 Actual, 2018-25 Forecast, millions

For the auto industry, several features are noticeable.

Peak ICE sales are already far behind us (occurring 2012-13) which is unsurprising as EV sales quickly grew to over 5% of a market where ICE sales were only growing at around 2% pa.

And for the current leaders in the car industry (echoing the past), there is some mixed news on the best-selling models.

Source – bilnorge

The number 1 and 2 brands in Norway are familiar marques – VW Golf (all versions, 75% electric) and the BMW i3.

However, if sales of Tesla X (4th position) and Tesla S (8th position) are added together, they occupy the No. 1 spot for an all-electric brand. This is without any presence of the Tesla 3, and after only one year’s full entry to the market.

The news for US brands is bleaker: only 1 US parent vehicle (GM’s Opel Ampera-e) features in the top 30.

Equally, there are no Chinese brands available as yet.

Norway’s Peak ICE Fleet

For the oil and gas industry, Norway’s peak ICE fleet, at about 2.51 million vehicles in this analysis, occurred most likely in 2015-16 as fast-growing EV sales permeate the country’s fleet, replacing older ICE models that are retired (at about 4.5% pa).

Note: Norway Peak ICE Fleet (2015-16): millions (2018-25 Forecast), source;  dollarsperbbl

Peak ICE Fleet is important as it signals the imminent arrival of peak fuel consumption.

This may not be simultaneous due to fuel efficiency trends, fuel prices and so on. But an estimate of peak fuel consumption in Norway in this model is 2016-17.

A look at the latest data on Norway’s fuel consumption shows a 3% decline in calendar year 2017 from 2016. (Note: This could be due to other factors such as price or the accelerated slump in diesel sales. These models focus on longer-term trends. Nevertheless, a reduction of 3% when overall fleet size is increasing is suggestive.)

Finally, the model indicates the likely shape of future oil demand decline: whilst it does start out shallow, by 2020 the annual decline rate may be as high as 3-4% pa, increasing to over 5% pa by 2025 – by which time absolute consumption could be 30% less than today’s peak.

This is driven by less ICE cars overall, and the increasing efficiency of the ones left in the shrinking fleet, as EVs quickly colonise the future car stock.

Which answers Norway’s peak fuel demand puzzle.

By definition, there will be a peak prior to the long-term downward trend: Norway appears to be at this tipping point.

Norway 2020: In sum, by 2020, at current rates of EV growth and ICE decline, EVs account for 4 in 5 sales, 1 in 5 of all registered cars, and fuel sales are 10% less than their 2016 peak, declining at 4% pa.

Early Lessons

The Norway experience, however niche, should serve as a wake-up call to both the global auto and oil industry.

For the Auto Industry there are perhaps three key lessons:

Peak ICE Everywhere

First – Peak ICE sales have occurred in Norway – but this is only partly due to its unique circumstances and policy incentives. It will happen in far bigger markets — and quickly.

This is due to a more systemic issue: the emergence of EV technology into mass commercial scale and high growth at a time when incumbent ICE fleet growth is maturing quickly.

In general, when EV sales grow fast enough to reach 1-3% of a total market share (global or local), they will stop any growth in ICE sales.

So, lest peak ICE sales in Norway be judged an aberration, consider this: In the largest car market in the world, China, there are also prescriptive targets for EV growth, as well as limits on ICE sales growth.

In 2017, China sold almost 780,000 electric cars (excluding gasoline-hybrids), a 2.75% market share; total auto sales grew by only 3%.

China’s plans for EV growth are more than ambitious: they are borne of necessity, and fulfill three national imperatives: to reduce oil import dependence, to improve urban air quality and to upgrade their industrial base as a major part of the “Made in China 2025” programme.

Thus, by 2020, the government’s targets are for 10% of fleet sales to be EVs, with 5 million EVs on the road and no further growth in ICE sales. Associated infrastructure development of over 4 million charge points (essentially one per vehicle), and incentive schemes for EV adoption of up to $8,000 per car are being used to drive the plan.

Given this, sustaining today’s EV growth rate of over 60% pa for one more year would place peak ICE sales in China in 2019 or 2020, at about 28 million cars.

It’s quite remarkable that China could reach peak ICE sales only 10-15 years after emerging as the world’s largest growth market for that technology.

And to continue, even in the relatively slow-to-adopt US market (25% annual EV growth currently) existing EV market shares of about 1.5% are already enough to naturally cap ICE sales growth.

Counter-intuitively perhaps, peak ICE sales in the US were likely set in 2016; a decline in sales in 2017 and 2018 (forecasted) mean ICE sales will likely never recover the absolute peak achieved in 2016.

source: dollarsperbbl

Switching to Electricity – The Rise of the Specialists
The mass EV adoption in Norway is also providing important data for industry leaders.

The incentive scheme is perhaps pulling forward price parity only by 3-4 years, showing that when prices are leveled (via market forces or special efforts), EV technology offers fairly effortless consumer switching: same car design, same roads, same or better driving experience and 80% lower running costs.

With charging infrastructure improving quickly, the core (technical) obstacles to wide-spread adoption look quite modest at scale, and not just in Norway.

Policy and taxation issues remain – but the Norwegian experiment shows a clear blueprint for mass EV conversion.

In addition, whilst electrified versions of well-known marques are clearly a safe initial bet for manufacturers and consumers, that could change very quickly.

In Norway, Tesla is already the No1 all-electric brand and was the overall market leader (all car types) with 15% market share in Dec 2017 – this before the Model 3 actually hits the road.

Likewise, lower-cost Chinese models have not yet appeared in the market. But China’s massive EV home-market manufacturing depth is already starting to produce a wide-range of models that may be able to undercut existing dual-power-train brands such as VW’s Golf.

The Retreat of US Brands?
Finally, Tesla-excepted, there is limited evidence of traditional US-branded EVs appearing in Norway’s market.

This small early signal could quickly become a large strategic issue. The EV field is already getting crowded. The problem for the US is that, even though annual US ICE Sales may have already peaked, the US still has a large ICE-bound customer, supply-chain and political base to satisfy that may cause them to under-invest in EV technologies.

What Norway (and other higher EV-growth countries) show right now is that the US brands are already losing out in market experience to their traditional rivals, and a cadre of new EV specialists.

And for the Oil Industry – What about Peak Fuel Demand?

Peak ICE sales are not a Norwegian-only phenomenon, and nor will peak ICE fleet and peak fuel demand.

Universal mathematics apply: as soon as EV sales breach the natural growth rate of ICE sales, ICE sales decline. And once these lower ICE sales are overwhelmed by retirement of the oldest ICE vehicles, the ICE fleet shrinks, and with it fuel demand, at an accelerating rate.

By 2020 China will have the world’s largest ICE fleet.

But China already consumes 60% less gasoline than the US even though the ICE fleets are of comparable size (younger fleet, far fewer miles driven).

Note: Forecast 2020 Fleet size (millions) and gasoline consumption (mtoe/pa) source: EIA, Oxford Institute for Energy Studies

And China will no longer be a traditional ICE market: it is, like Norway, a policy-driven EV market with precise top-down targets. The EV growth (and hence ICE-curbing) targets are detailed and incentivized.

A comparison of likely ICE fleet outcomes is shown below for policy-driven Norway and China, compared with the laissez-faire direction of the US.

Note – % EV share of total fleet (2017 actual, others forecast): source:  dollarsperbbl

Fuel demand growth therefore has two strong headwinds to deal with starting now: the plateau and slow decline of the US fleet, and the rapid, planned electrification of future Chinese one.

Together, by 2020 these two fleets will consume 65% of global gasoline and account for one in every two cars.

But latest estimates for US fuel demand growth are flat or in decline, and for China at around 100-150 kb/d pa on a downward trend. It is difficult to see how other, smaller, markets such as the EU or India can fill the gap to sustain robust near-term fuel demand.

Assuming these headwinds continue, a model of future fuel demand shows the following profile, indicating a peak of gasoline demand in 2024-25, followed by accelerating decline of 500-700kb/d less than a decade from now.

Note: change in global transport fuel demand: 2016-17 actual, 2018-2030 forecast, kb/d, source dollarsperbbl

Norway’s transition, and China’s extra-large equivalent will potentially force oil demand into a quicker, more sudden decline than anticipated.

A Powerful Norwegian Saga
Narratives matter.

Despite the simple mathematical form of a peak, the shift from growth to decline will generate complex narratives and counter-narratives about the future shape of oil demand (as shown in the demand chart above), especially close to the actual peak.

Oil has not encountered direct competition in transport for over a hundred years: but it has now, at a time of its own weak growth and strengthening technology from its challenger.

Norway’s short but powerful EV saga will be followed in kind by the largest growing car fleet in the world, in China.

Both these planned EV markets will start changing the narrative of the EV transition.

1-3% EV market share will soon move from being immaterial to being a recognized transition point.

Norway provides the early and detailed signals of how the change occurs on the ground.

But China’s similar large-scale ambition will deliver a wider transformation.

Two giant industrial markets, automotive and oil, with revenues of over $4 trlillion pa, need to prepare their comprehensive responses, soon.

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My thanks to Liam Denning of Bloomberg for comment and insight on this post