Smoked

Monday 12 June 2023

AI generated image of a city under smoke.

While an outright decline in global oil consumption is still several years away, the building blocks to decline are showing up now in multiple domains. The current view of The Gregor Letter is that global oil demand peaked in 2019, and began a multi-year standoff that will oscillate in a range of 1.00% - 1.50% around the 100 million barrel a day (mbpd) level. This oscillation should break down sometime after 2025. A safe bet right now, for example, is that global oil consumption finally starts to decline in 2027. Here’s what that might look like:

While it sounds unnecessary to say because it’s so obvious, oil demand has three possible regimes: an era of growth, an era of stasis, and an era of decline. That middle era receives far too little attention. The US, for example, has been on an oscillating plateau in total crude oil consumption for fifteen years. And its gasoline demand has been on a plateau nearly as long. Please remember these examples each time your intuition tells you that peaks are followed by declines. They are not.

Each type of demand era is hard to achieve. It’s not easy in a growth era, for example, to retain all the demand from a previous year, while adding new marginal demand in the current year, only to then repeat the process the following year, for many years to come. Today, the world has now achieved stasis in oil demand, and that was no easy task. First, global auto sales of ICE engines had to peak. That happened in 2017, and China ICE sales peaked the same year. Efficiency gains in newer ICE vehicles had to keep pressing forward, and transportation solutions in public transit also had to make gains either through newbuild or resurrection of older lines. All that happened. Then EV adoption had to get going not just in cars and trucks, but in two and three-wheelers, which are so dominant in Asia. Historically, for example, India’s two and three wheeler fleet (the largest in the world) has collectively consumed at least as much if not more petrol than the country’s vehicle fleet. Finally, some behavioral change was needed and the world was introduced to work-from-home as the result of the pandemic. All these factors combined to get us to a plateau.

So why is global oil demand not declining yet? First reason: because the existing ICE fleet hasn’t peaked. Or, if it is peaking, that’s only occurring just now. Bloomberg estimated that the existing fleet of ICE passenger vehicles peaked last year. Even if true, however, the rollover is exceedingly gentle. Some are confused as to how global ICE sales can peak in 2017, while the fleet keeps growing, pushing a peak in the total fleet out later in time. The answer is pretty easy: ICE sales press onward at high levels (below peak) while at the same time ICE vehicle lifespans continue to lengthen, now at a record over 12 years.

This is the main reason why The Gregor Letter is looking after 2025, into 2026 and 2027 for a decline to begin, because these years approach the ten year mark after peak ICE sales, and, cars purchased in that year will start to retire. In other words, the first upsweep of EV adoption is additive, not revolutionary, in that it creates a fresh layer of zero emissions vehicles on top of the existing ICE fleet. The great replacement occurs when the ICE fleet peaks, with no help from ICE sales to match that decline. Again, the automobile era is over 100 years old; getting to the moment of decline is a process.

So, how do we get to decline? Well, California is instructive, and may even offer a template. The Gregor Letter suggested in December of last year that California petrol consumption, after plateauing for over a decade, was finally ready to fall. Let’s tally up the factors that finally caused the tipping point in California.