In recent weeks I have reported on some major shifts underway in the energy sector that will create many winners and losers. Some of these shifts are already making waves, while others will do so over the next several years.

In the previous Energy Letter I discussed impending changes to the nation’s renewable fuel program that will improve the outlook for refiners at the expense of fuel retailers. I’ve also discussed the improving outlook for the midstream sector under President Trump. We have already seen the new administration take action to complete the stalled Dakota Access Pipeline and to revive the Keystone XL pipeline.

But in another case it is a widely expected shift that I believe is unjustifiably distorting investor expectations about future oil demand. A new report from Carbon Tracker and the Grantham Institute at Imperial College London highlights the issue, and has received a good deal of mainstream press coverage. It’s titled Expect the Unexpected: The Disruptive Power of Low-Carbon Technology. Among the report’s key findings:

EVs account for approximately 35% of the road transport market by 2035 – BP put this figure at just 6% in its 2017 energy outlook. By 2050, EVs account for over two-thirds of the road transport market. This growth trajectory sees EVs displace approximately two million barrels of oil per day (mbd) in 2025 and 25 mbd in 2050. To put these figures in context, the recent 2014-15 oil price collapse was the result of a two mbd (2%) shift in the supply-demand balance.

To be clear, this report wasn’t put out by disinterested observers. Carbon Tracker’s objective is to limit future carbon emissions. Its report makes extremely aggressive assumptions about future EV cost reductions, which leads the authors to the conclusion that EVs will reach cost parity with internal combustion engines by 2020, and overtake them in market share during the 2030s.

The report projects a 20% market share for EVs by 2030, which would require some 333 million electric vehicles on the roads. This compares to around two million EVs on the road today, and would require an annual global growth rate of 30-40% from now through 2030. For reference, Inside EVs just reported that global EV sales in January 2017 were 41,372 vehicles, only 12.7% higher than the total sold in January 2016.

The report notes that BP’s 2017 energy outlook projects that EVs will only command a 6% market share in 2035, which would amount to 100 million vehicles. That’s still pretty impressive growth (15-20% annually), but it only displaces about 1.2 million bpd of 2035 oil demand — demand that continues to increase by more than 1 million bpd every year. In contrast, Carbon Tracker “sees 16.4 million barrels of oil per day (mbd) being displaced annually by 2040 due to EV penetration in the road transport sector.”

The report notes that the divergence in these scenarios “presents an interesting dilemma for investors.” Indeed, I would agree with that. But I would say that the most likely scenario is that EVs continue to grow at respectable, but not astronomical rates. BP’s estimate is more realistic in my view. It assumes that while many EVs are going to be hitting the roads. oil demand in 2035 is going to be significantly higher than it is today.

In fact, this week the International Energy Agency released its Oil 2017 report, in which it forecasts that oil demand is going to continue its long-term growth trajectory of adding at least a million bpd of demand every year. The report projects that global oil demand will pass 100 million bpd in 2019 and reach about 104 million bpd by 2022. The report warns that EVs “will displace only limited amounts of transportation fuel by 2022” and that the world is “risking a sharp increase in (oil) prices, unless new projects are approved soon.”

An interesting dilemma indeed. Oil demand is going to plummet, or oil demand is going to outpace supplies.

The funny thing is that the markets haven’t fully priced in any of these pending policy shifts. Join us at The Energy Strategist and MLP Profits as we position investors to profit once they do so.

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