The Great Transition: Andreas De Vries and Salman Ghouri on the Future of Oil


Competent forecasters produce strategic guidance based on probable trends and their effects within a broad range, rather than making bold statements about the future. An omnipresent debate among energy analysts is the impact of electric vehicles (EVs) on oil demand as they encroach on the Internal Combustion Engine Vehicle (ICEV) market.

Predictions here often only consider near-term EV trends while missing a more holistic picture, including the historic curve of technological adoption and a systemic analysis approach that looks beyond an application’s initial intended use. Given these divergent approaches, estimates of the number of electric vehicles in the world by 2040 differ by hundreds of millions, with varying scenarios carrying profound implications for resource revenue dependent countries, including Iraq. Looking beyond EVs, there are a growing number of trends that will have a dramatic effect on oil demand, set against the march of changing demographics. In this respect, some have argued EV adoption is only one component of a much bigger picture.

To discuss these developments, Iraq Energy Institute invited Salman Ghouri and Andreas De Vries, who have built their careers in strategic energy forecasting and understanding the political economy of energy, advising senior government officials and private sector decision makers. We have shared their commentary below, under five broad headings:

Adapting to the global energy transition of electric vehicles

We do not foresee oil demand to go away anytime soon, not even if transport electrifies faster than (we) assumed in “Wake up call for oil companies: electric vehicles will deflate oil demand”. It is not likely, namely, that the 1 billion or so ICEVs on the road will simply be abandoned once EVs become cheaper to manufacture than ICEVs. We expect that to take probably another decade, after which the existing fleet of ICEVs will continue to be used until the end of their economic life – most likely in the developing world. Transportation-related oil demand therefore definitely has a few more decades to go. We expect it to plateau around 2030 under the impact of the electrification of transport, and to enter a gradual decline thereafter.

Therefore, we do not expect a future such as the one forecasted by Tony Seba, who sees oil demand peaking as early as next year and largely disappearing by 2030. Through our writings, we have tried to bring to the attention of the Oil & Gas Industry that a new market dynamic is likely to develop as a consequence of the electrification of transport. The global EV market has been growing at some 60% over recent years, even faster than what we assumed in the High Case in our Alternative Energy Outlook which forecasted EVs to eat up over 40 million barrels of daily oil demand by 2040. A plateauing of oil demand is therefore likely to happen over the coming years, while at the same time new production technologies (i.e. shale) are unlocking (i.e. making economically recoverable) massive new reserves. This will show in the price of oil, of course, and that is really at the heart of what we have been saying: the “lower for longer thesis” is the most likely outlook for oil, pretty much irrespective of whether EV adoption will surprise or disappoint over coming years.

The good news for the oil revenue-dependent countries is, therefore, that most of their oil will most likely be monetized – especially the oil of the oil-rich countries of Arabia which, because of their low production cost, will most likely be amongst “the last barrels ever produced” as Amien Nasser of Saudi Aramco recently said. But oil revenue-dependent countries do have to expect a much lower price for their oil, even lower than today. And we see no “oil strategy” that can avoid this.

Oil demand from petrochemicals might grow as some argue, but we remain sceptical of the IEA view that it will more than absorb the impact the electrification of transport. We also expect the global Sustainability trend to start impacting plastic demand over the coming years.

Our view is documented in “How To Mitigate The Risk Of Peak Oil Demand.” We believe the optimal risk mitigation strategy is the development of an economy that can stand on its own two feet, without oil. This is really a mindset change in the oil revenue-dependent countries. The national oil companies should be left to focus on optimizing the monetary value of the oil resources. But separate from the oil company, initiatives should be launched to facilitate and incentivize entrepreneurship – and the best incentive is to create a level playing field in the economy that rewards effort and discourages rent-seeking behaviour.

Aspects missing from the great debate on EVs and ICEVs


We wanted to highlight that the Oil & Gas Industry’s view regarding the electrification of transport has clearly changed since we wrote our articles on the subject early 2016, such as “The Second Automotive Revolution: Implications for the Oil Industry” and the earlier mentioned “Wake up call for oil companies: electric vehicles will deflate oil demand.” Back then, most in the industry considered our point-of-view, that a trend towards the electrification of transport was developing, and is likely to have far-reaching implications for oil demand in the medium term, as either “unlikely” or even “unrealistic”. The fact that today we are writing this article is an indication that things are now very different. The electrification of transport is now generally considered as one of the main strategic risks facing the Oil & Gas Industry. Different people still have different views about what will happen exactly, and when it will happen, but everyone is now looking at the subject and thinking about it.

Some, in particular, the European IOCs, are even strategically preparing for it, a witness, for example, the investments made in battery technology and electric charging stations by Shell, Total and BP.

As for the missing aspects of the debate, it seems as though the Oil & Gas Industry is split between two main opinions. As mentioned, the European IOCs have publicly acknowledged that the electrification of transport is underway and will eventually have an impact, as EV uptake slowly but steadily progresses. The US IOCs, on the other hand, seem to have settled on the view that because EV penetration is so low today, a steady continuation of current EV uptake growth will not have a meaningful impact on oil demand at least until 2040.

In our view, both opinions (1) do not properly factor in the typical development curve of technological innovation, and (2) do not properly factor in other new trends that have the potential to accelerate the electrification of transport.

Regarding our first point, when discussing the electrification of transport (or the impact of any trend for that matter), most people assume a linear change. However, technological progress is usually not linear. It typically follows an S-curve where early improvements are difficult and take time, but after a certain point, the rate of improvement increases exponentially, only to flatten again once the limits according to the laws of nature threaten to be reached.

In our view, therefore, the real take-off of the electrification of transport is still to take place. While there are various studies that have concluded EVs are cheaper than ICEVs on a lifecycle-basis, we are still only at the (late) beginning of EV technological innovation. Therefore, if EV technological innovation continues the path typical for innovation, during the 2020s we will see a major acceleration in the improvement of EVs and they will become not only cheaper to operate than ICEVs but also substantially cheaper to manufacture.

If this is indeed achieved, as most battery technology experts (and we) expect by around 2025, EV adoption will no longer grow linear but exponential. ICEV sales could then plummet as most people do not have an emotional connection to their drive train – they want a vehicle that transports them in a safe, reliable, comfortable manner, as cheaply as possible. So, if the cheapest answer to this demand is EV, then why would people continue to buy ICEVs?

In other words, we believe the current debate about the electrification of transport is to a large extent based on an incorrect expectation regarding the development of technological innovation, as a consequence most forecasts of EV uptake underestimate what will most likely happen.

Regarding our second point, most trend analyses have something of a ceteris paribus (all other things equal) assumption built in them. This is understandable since it is very difficult to forecast the impact that different trends affecting each other will have. Unfortunately, this is also very wrong, especially in the case of the electrification of transport.

There is a massive change underway in what people commonly refer to as “mobility”, with the electrification of transport being just one of them. One other important trend is a move towards “mobility as a service”, as younger people are not as eager to own a car and see services such as UBER, LYFT, CAREEM and GRAB as much more fitting for their preferred lifestyle. Another important trend is the autonomation of transport vehicles. If reviewed independently these two trends appear irrelevant for oil demand. Whether one drives with his own car or uses a transport service, the miles driven stay the same, right? And whether a human is driving, or a computer is, the miles driven stay the same, right? Combined, however, these trends have far-reaching implications for oil demand.

If the future is about transportation as a service, and the service is provided by autonomous vehicles, then electrification will be accelerated due to what could be called “constructive interference”. Autonomous taxis must be on the road as much as possible to make their economics work. Since EV reliability and durability is much higher than that of ICEVs, this means electric autonomous taxis will be the default option because their utilization will always be higher than that of ICEVs (since these require more frequent and more elaborate maintenance) and their cost of operation will be lower than that of ICEVs (since these require more frequent and elaborate maintenance).

As the technology advances it will also have implications for trucking and buses, which can of course also run on electricity. The UK, for example, is to get self-driving buses and taxis by 2021.

So, in summary, we see the debate about the electrification of transportation in the industry as underestimating technological innovation, as well as ignoring the impact of the different current mobility trends coming together. Consequently, even the most optimistic opinion that can be heard in the industry, that of Shell, we think still underestimates what will really be happening once innovation in battery technology allows for EVs to be manufactured at a cost lower than that of ICEVs.

As a side note, a new report by McKinsey is the latest to forecast a plummeting of battery costs. The consulting firm’s 2019 Global Energy Perspective foresees a two-thirds drop in the cost of EV battery packs by 2030. The tipping point at which EVs will be cheaper to own than internal combustion engine-powered vehicles is forecast to be reached in the early 2020s.

The challenge of meeting electricity demand in emerging economies and the risk of an “EV gap.”

It is not uncommon for technological innovations to be adopted by developed economies first, and by developing economies only later. However, it is important to point out that this is not always the case. The telephone is a good example: the least developed economies did not follow the example of the developed economies which first built a comprehensive network for fixed-line phones (from the 1920s through to the 1960s approximately), and only thereafter a comprehensive network for mobile phones. Once mobile phones became available, they just skipped the fixed line phones and went straight from “no phone” to “mobile phone”. In fact, it is in electricity generation that we can imagine something similar occurring, with the poorest regions of the world skipping the phase of developing macro-networks around large scale fossil fuel power plants, to directly going to micro- and meso-networks based on renewable energy since this is much cheaper to build.

Will this be able to meet the electricity demand of electric vehicles? Probably not if it is the Tesla 3 we are thinking about. But could this suffice for the energy needs of electric transportation system specifically designed for the developing world? Possibly.

We believe it is not impossible that transport in the developing world will electrify using different, customized transportation solutions.

Right now, the developing world, in particular Africa, imports the cars discarded by the developed world. If the developed world begins to discard ICEVs because EVs have become cheaper to manufacture and operate, will this again happen? Will this lead to a flooding of the developing world with ICEVs from the developed markets, thus lower car prices in the developing world, and consequently shift oil demand from the developed world to the developing world? It is possible.

It is also possible, however, that some smart entrepreneur will see an opportunity to electrify transport in the developing world based on renewables centered micro-grids, using transportation solution customized for the needs of the developing world: smaller, less luxurious, less range, and consequently with a much smaller battery and electricity need.

It is difficult to predict the future, but we do not rule out the latter possibility, especially as urban pollution in the major cities of the developing world is becoming a major issue attracting government attention. 

EV adoption and the erosion of demand: A welcome disruption of price volatility as the world faces a future oil supply crunch?

The oil industry in general, including the oil revenue-dependent countries, doesn’t mind the volatility caused by regular booms, it dislikes the volatility caused by regular busts. If given the choice between an on average lower price with less volatility, or a higher average price with more volatility, we think most will choose the latter.

Besides that, we are less concerned about a supply crunch developing over the coming years. At the height of the 2015 – 2017 low price environment, many forecasted that a crunch would follow around 2020. We are now in 2019 and the IEA recently announced that because US Shale has continued to surprise, and the expected mature field decline never really materialized, while companies have become smarter in how they do business, from exploration to development to production, we are now facing a supply glut.

In our forecasts, we tend to be optimistic (compared to our peers) about technological innovation. For this reason, we are less concerned about supply crunches during the 2020s.

Embracing disruptive technology  

Fundamentally, the intent of our writing since 2015 is to bring to the attention of the oil industry, particularly the oil revenue-dependent countries, that things are changing and changing quite fast. We shared our views about what is likely to happen, to enable such countries to make an informed decision about whether they want to react, and strategize accordingly, or not. In order to formulate a new strategy, one thing is to realize and understand the changing dynamics, another is realizing and understand one’s own strengths. Only then can one truly strategize.

Of course, this means the strategy for one country may not fit another country. So, one cannot really talk about “the strategy” for oil revenue dependent countries in light of the electrification of transport and renewables. But there are some opportunities that could be considered.

Renewables are a business opportunity the world over, as in numerous environments their levelized-cost-of-operation is lower than that of fossil fuel-based energy. Conceptually, therefore, by enabling lower domestic use of fossil fuels, renewables could help the oil revenue-dependent countries of the Gulf make more oil and gas available for exports (or lower the investments necessary to maintain a certain level of exports).

With the amount of sunlight available in the oil revenue-dependent countries of the Gulf, one would think there is a great opportunity for solar, to reduce the amount of crude and gas burning that takes place in power generation at present. We are aware there are also challenges with solar in the region, primarily sand dust covering the solar panels leading to reduced efficiency. Of course, the company that can resolve this challenge will have opened for itself a tremendous business opportunity.

Another opportunity is for the oil revenue-dependent countries of the Gulf to look at refrigeration technology. Air-conditioning is a major source of electricity demand in the region, and the technology behind it is ripe for disruption. So again, the company that can resolve this challenge will have opened for itself a tremendous business opportunity.

What we’ve seen is that in the oil revenue-dependent countries of the Gulf the task of exploring such opportunities is often given to the National Oil Company, as they are considered the best equipped and experienced to undertake such complex projects. But of course, oil companies are first and foremost oil companies, and experience the world over shows that companies tend not to disrupt themselves.

Therefore, to make real progress in the area of renewables and other technologies that have the potential of reducing energy usage and the cost associated with it, really require establishment/entry of new organizations more focused on these subjects. And this brings us back to what we discussed in answer to your first question because this could be one of those areas where a state initiative to incentivize and facilitate entrepreneurship could be significantly impactful.