Long-Term Oil Demand Is More Bullish Than You Think

Many investors are wondering about the future of oil demand, given discussion around achieving net-zero carbon emissions by 2050. Surprisingly, a consensus base case for oil demand doesn't exist. Other forecasters typically lean on a variety of scenarios rather than staking out a base case. Neither the typical "business-as-usual" scenario nor the typical bear scenario is a good guide for long-term oil demand. The business-as-usual scenarios reflect pessimistic attitudes when it comes to major clean technologies like electric vehicles. On the other hand, the bear scenarios reflect very rosy assumptions around the implementation and efficacy of carbon policy. Our base case is far closer to the business-as-usual scenarios for oil demand than the bearish scenarios. We project oil demand to drop from 99 mmbp/d in 2019 to 88 mmbp/d in 2050, an 11% drop or 0.4% annual decline.

Our bullish views on oil demand aren't due to electric vehicles, where we're very optimistic on adoption. We project EVs to reach 57% of the passenger car fleet by 2050 and 59% of freight truck volumes. Still, the switch to EVs won't happen overnight, owing to the long life of the average vehicle. For passenger cars, we expect greater demand than the bear scenarios due to sluggish efficiency gains for the remaining gas-burning cars on the road (including hybrids). There has been a yawning gap between real-world and official fuel efficiency, a fact that most other forecasters fail to appreciate. Ships and planes aren't eligible for electrification, so the most promising route for replacing oil is using green hydrogen and its various derivatives. However, we're skeptical that these alternatives will reach cost parity with oil even by 2050.

We're far from blindly optimistic about oil. Road freight is one area where we're closer to the bears. We're more upbeat on electric trucks than most others, as we think freight trucks are actually an ideal case for EV adoption due to their high utilization.