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Cars drive down an avenue (REUTERS)
Cars drive down an avenue (REUTERS)

Peak oil? Drivers—and voters—could delay it for years

Investors and politicians have made their views clear about oil’s uncertain future. Consumers, not so much.

You might be filling up your tank a lot longer than BP thinks.

Ambitious green policies—from politicians and even the newly climate-conscious oil companies—suggest the world is moving at warp speed away from fossil fuels. But the transition might not be easy on consumers’ wallets, which is precisely why it could take a while.

The idea of “peak oil," historically a reference to a fear that oil supply was running out, now means something entirely different. British energy giant BP suggested that oil demand might have already reached its apex in 2019 if one were to imagine a world that doubles down on policies that restrict carbon emissions.

Predicting the peak
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Predicting the peak

Others are more conservative. Under its “stated policies scenario," the International Energy Agency estimates that oil demand will peak around 2030 and plateau. That scenario takes into account announced policy measures and its own judgment of how attainable they seem. As the IEA acknowledges, though, some of the declared policies are far-reaching targets. Chris Midgley, head of analytics at S&P Global Platts, says his group projects the world is unlikely to reach peak demand until the late 2030s, noting that demand for petrochemicals in particular seems resilient.

Transportation plays a key role in the timing of that peak; it accounts for the largest share of petroleum consumption globally. For electricity to crowd out oil as a transportation fuel, governments must either provide taxpayer subsidies that make electric vehicles more affordable or place a cost on not switching over, such as even higher taxes at the pump.

Of course, if technology advances quickly to make electric vehicles cheaper, those carrots and sticks will no longer be as important.

For now, a shift in the political winds can have an abrupt impact. China, for example, reduced its electric vehicle subsidies in 2019, leading to a steep decline in sales. France in 2020 announced a cutback on electric vehicle subsidies for future years even as it plans to end sales of fossil fuel-powered cars by 2040. Several other governments have declared plans to ban sales of new gasoline and diesel cars, including other European countries, Japan and California. But given the long time horizons, these goals should be taken with a pinch of salt. Politicians making promises today won’t be the same ones making tough decisions in a decade or two.

Nobody likes paying more for energy. Policies that directly raise prices have a track record of sparking a backlash. Such setbacks seem more, not less, likely in the post-pandemic world when economies around the world emerge with weaker balance sheets and a price-sensitive population. As Bob McNally, president of Washington, D.C.-based consultancy Rapidan Energy Group, puts it: “motorists are voters."

France introduced fuel taxes in 2018 that were intended to cut pollution, but the move caused such an uproar that it led to a reversal of the policy. In 2020, both Nigeria and India saw protests break out after their respective governments proposed actions that would effectively hike gasoline prices—the former reduced fuel subsidies and the latter proposed an increase in excise taxes on diesel and gasoline.

Electric equilibrium
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Electric equilibrium

The inertia in the switch away from oil is probably more marked in developing economies, which have accounted for the majority of oil demand since 2012. An entire industry exists around taking used cars from developed markets, some of which may no longer meet emissions standards, and selling them cheaply in Africa, Asia and Latin America.

Hefty upfront costs remain a barrier even for consumers in wealthier nations. In the U.S., for example, the cost of fueling an electric car is roughly half the cost of gasoline required for the same distance, according to the Department of Energy. Still, relatively pricey electric vehicles accounted for just around 2% of new U.S. car sales as of the first half of 2020, according to the Edison Electric Institute. Europe isn’t much better: Electric vehicles account for roughly 7% of the market and its consumers were increasingly buying thirsty SUVs in 2020.

Though both oil and gasoline prices have recovered from the lows of April 2020, retail gasoline prices remain close to the cheapest they have been in years. While gasoline prices are set to increase this year, the price EIA forecasts is still 22% below the average seen for 2010-2019, while residential electricity prices are expected to be 7% above the ten-year average.

Naturally the Covid-19 disruption has the potential to swing oil demand the other way, too, and some countries might find themselves doubling down on their transition away from oil as a way to stimulate their economies. U.S. President-Elect Joe Biden had announced a so-called “Green New Deal" as part of his climate plan.

Investors, politicians and corporations have all signaled a switch towards a future with less oil. Ultimately, though, the industry’s fate could come down to what consumers want. They don’t only vote at the ballot box - they vote with their wallets too.

This story has been published from a wire agency feed without modifications to the text.

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