We hear a lot about upcoming disruptive green technologies, that are poised to end the era of hydrocarbon energy in the economy. Let’s have a look at the numbers, to see how these new technologies will impact future requirements for oil and natural gas.
In the transportation sector, oil is the dominant fuel by far, with light vehicles (cars, SUVs and light trucks) using about 60 percent of all oil consumed worldwide, mostly in the form of gasoline refined from crude oil. The light vehicle fleet, numbering about one billion globally, is the segment that could be disrupted by electric vehicles, and indeed could technically be completely replaced by electric models over time. If all light vehicles were instantly transformed into electrics, global oil demand would fall from 100 million barrels per day to around 40. At present, there are nearly 2 million electric vehicles on the road, with rapidly expanding manufacturing capacity that can add another million each year. The auto industry in total manufactures 80 million light vehicles per year of all types. Forecasters think that most new vehicles sold will be electric by about year 2040, which implies an electric vehicle sales rate of 40 million per year by that time. However, the entire fleet of vehicles is expected to grow as global population and wealth continue to increase, resulting in a relatively flat population of “gasmobiles” near one billion, as forecast in the graphic below, courtesy of Bloomberg:
The implication is that oil demand for the light duty transportation fleet will not change much in the next 25 years, reduced only by ongoing efficiency improvements.
But what energy source will power the large and growing fleet of electric vehicles?
The electricity will come from our power grids, which get energy from a combination of generation assets. Coal, hydro and nuclear power plants provide a solid base-load, and like to run steadily with high capacity factors. Coal has been the biggest energy source to date, but is in rapid decline and is being phased out in most jurisdictions. Existing wind and solar assets operate as much as they are able, affected only by the wind and the sun.
That leaves natural gas fueled power plants to handle growth in peak demand as well as to provide incremental energy for new loads. These plants, fitted with aircraft derivative turbine engines, are present in almost every electrical grid, and are key to reliability as loads rise and fall. In North America, they make up about 40 percent of installed capacity, yet run only one quarter of the time. These fast response generators provide the critical swing as demand fluctuates hourly and seasonally, and as intermittent supplies like solar and wind ebb and flow. Electric vehicles will depend on natural gas as surely as if they carried it with them in onboard tanks.
Many people find this conclusion hard to understand. Quebecers will tell you that electricity in Quebec is almost 100 percent hydropower, while folks from West Virginia will tell you that their state generates 94 percent of their electricity from coal. What is more important is that both are integrated into the huge Eastern Interconnection Power Transmission Grid, in which the largest single generation source is natural gas at about a third of the total. Hydropower rich areas generally export surplus power, and while they may not burn hydrocarbons locally, any added load has the direct effect of reducing power exports. The neighboring grids must then make up the difference, which invariably will come from natural gas. In our interconnected continental power systems, it is best just to think of all incremental electrical demand to be fueled by gas: add a kilowatt hour of demand anywhere, and a kilowatt hour will be supplied by a natural gas engine somewhere else.
As the electric vehicle fleet grows to 500 million units by year 2040, it will demand the same amount of energy contained in 30 million barrels of oil per day, which is equivalent to 180 Bcf of natural gas per day (one half of current global gas production). Electrical grids would have to transmit twice as much total energy as they do at present, and electric utilities might need to double the capacity of gas fired generation facilities.
Part of this new electrical energy requirement will be met by natural gas, and the rest by the only two other viable generation sources, solar and wind power. These renewable energy sources are generally misunderstood, as they are often thought to be direct replacements for other types of power plants. In practice, solar and wind generation reduce run time in natural gas plants, and save valuable fuel. They do not serve to meet increased load peaks or improve grid stability.
While present day renewable generation is useful, it has not generally been economic without subsidies. Government policies including feed in tariffs, renewable portfolio standards and tax exemptions have driven wind and solar projects to date. Wind power can compete unsubsidized with natural gas at about $6/Mcf, about twice the current price in North America. Solar economics are presently leaner than wind, but costs are falling quickly, and we will see a major disruption as prices approach $1/watt, from the current costs of around $3. Solar will then become stand-alone economic and dominate longer term as costs fall even further.
Solar and wind are presently being added at a combined pace of about 130 Gigawatts each year. The graphic below (again from Bloomberg) is a reasonable forecast of future capacity additions:
Natural gas power generation will sit in the middle of the intersection of electricity and transportation. Each one million new electric vehicles will require an additional 250 MMCFD of gas supply. But gas demand will drop by the same amount for every 5 GW of renewable energy that gets installed, roughly the capacity of one million residential rooftop solar systems. It will be interesting to see which trend outpaces the other, driving incremental gas demand either up or down.
Regardless, all credible forecasters predict growing demand for oil and gas worldwide for the next number of decades, as the changeover proceeds at a manageable pace.
Larry Weiers has extensive experience in many areas of the energy sector. His most recent role before retiring was VP of Energy Technology and Innovation with a senior North American integrated Petroleum company. He has published an e-book titled “Sustainability of the Modern Human Economy”