Slow Boat
Monday 13 April 2020
Full year estimates of global oil demand growth are coming down dramatically. But given the ongoing macro uncertainty, these forecasts are little more than shots in the dark. EIA Washington’s 2020 outlook has now swung from +1.34 mbpd of growth (at the start of the year) to -5.23 mbpd of decline. We await estimates from IEA Paris and OPEC in the coming week. Everything depends of course on how the pandemic’s ongoing threat will oscillate—first as we head into summer, and then more importantly, as we turn towards Autumn. There’s a decent prospect that economic conditions become notably less bad as we head into summer (certainly less bad than common expectations) but remain much further below trend in the second half of the year. Accordingly, I think global oil demand could see a 10 mbpd decline compared to last year. If that seems overly negative, consider that OPEC, now emerging from a protracted and messy negotiation, has just managed to corral various producers into a 9.7 mbpd production cut.
My own forecast follows my rough map for the year economically, alluded to in the discussion of California gasoline consumption in last week’s letter. I see a very deep and sustained collapse in global oil demand in the current quarter. India is seeing a 70% decline at the moment, for example. The partial re-opening of economic activity in some regions in Q3 will surely take demand up from the deep lows, but air, train, bus, and car travel will still be quite depressed. And unfortunately, given the global nature of the pandemic, Q4 is not likely to be much better. My general macroeconomic forecast holds that the lingering effects of the initial shock will compound in the second half of the year, even as our coping strategies improve moderately through testing. But the brutal reality will remain: until the world has a vaccine, our tactics will bring some relief, but not a resolution.
The US dollar has a nasty habit of strengthening during crises, tightening the system’s screws to a maximum. Surely that’s why the Federal Reserve, among its various bazookas, has added dollar swap line facilities to foreign central banks. But it’s not the major currencies that have struggled, so far, against the US dollar. The Peterson Institute for International Economics (PIIE) has a handy chart up on their blog, showing that the currencies of major energy exporters have notably (and unsurprisingly) shouldered much of the US dollar strength during the crisis.
The size of the just announced OPEC cut will probably jumble up these current trends, but it always bears repeating: production cuts never truly solve the problem of oversupply or weak demand, because the futures market simply moves the cut from the production column to the capacity column. So yes, in the short term, front month oil and the currencies of oil producers may strengthen on the back of OPEC policy agreements. But those agreements are shaky, and risky, and the job of the futures market is to reflect that reality in the long-term price of oil.
Because path dependency is real the pandemic will not deliver freely given gains to the project of energy transition in transportation. That said, electrification of transport is also quite real. And, trends in place prior to the crisis will also benefit from path dependency. As we continue the Oil Fall update, it’s time to refresh the outlook for China.
Let’s begin with a seemingly dramatic assertion: China has now killed the future of the internal combustion engine vehicle (ICE). Precision of language is important, here. China did not kill the existing fleet of ICE globally, nor did it foreclose upon further sales of ICE vehicles. But China’s invisible hand painted the peak of ICE sales growth in the 2017-2018 period, and there will be no turning back. In contrast to my concern for EV markets like the US, plug-ins will disproportionately take the bulk of the growth in China when the economic rebound eventually comes. And that will seal the ICE fate, globally.
China’s total vehicle market fell by 8.23% last year, with plug-in sales falling by 4.3%, as ICE vehicles shouldered the bulk of the loss. The same will be true this year, with losses heavily falling on ICE. Here’s an easy guide going forward for the China market: during growth, plug-ins will enjoy the bulk of the gains and ICE will stagnate. During declines, plug-ins sales will fall more gently or hang tough, as ICE sales crater.
The chart below is a work in progress. I’m currently rolling through all the data to compose the Oil Fall update, but this is the direction I see for the Chinese market.
Notice how sturdy the EV market share has been in the two difficult years behind us, and in 2020 also. I’m inclined to forecast the total market falls by nearly 20% this year, with EV sales falling nearly 9%. And yet, the 5% market share for EV remains. Again, if this outlook seems overly negative, we must consider that China’s auto sales are already down a torrential 42% in the first quarter of 2020.
Next year, 2021, is a different story. After three down years (which are now resolving into the current deep hole) the entire market rebounds by about 11% in my forecast, with EV growing by 100%, and ICE by nearly 6%. Even so, that leaves ICE sales hovering just above 20 million units, a dramatic change from the 28 million ICE units sold in 2017. Best of all, the EV share utilizes the 5% level as the breakout point to move above 9%, following an oft-observed dynamic in new technology adoption. Needless to say, if this projection comes to pass, it will also structurally change the future course of road fuel consumption in China. I will address that too, in the Oil Fall update.
Small behavioral changes may indeed emerge from the crisis, and it’s good to keep an open mind about their potential effects. As cities head into summer with large populations trapped in apartments, it’s time to think about opening space for people to get outside and exercise—without having to face crowds. Boston, Minneapolis, and Oakland are all closing down streets now as the temperatures rise. As measured in miles, Oakland appears to be the most aggressive, closing down a total of 74 miles of urban streets for the sake of walkers, joggers, and cyclists. If populations come to enjoy the freedom of these street closures, then policy measures which increasingly ban cars from city centers, already in place in European cities, will appear in the US sooner than expected.
EV market share is off to a strong start this year in Europe, as the total market is crushed. The dynamic is following the contours laid out in the previous discussion of the Chinese market. One might call this a kind of ratchet, in which EV sales fall less severely than the total market during the tough times, thus taking greater market share. But then, during the good times, EV sales soar and thereby suppress even more effectively ICE growth. According to Transport and Environment, a clean transport think tank, EV sales share reached 8% in Q1, on average, in the EU’s biggest markets: France, Germany, and the UK.
The Gregor Letter has also received some reader mail concerning the UK car market specifically, noting that the second half of 2019 finally showed some real momentum. In a previous edition of the letter, I was a bit glum about the 3.1% market share of plug-ins for all of 2019. But, Andrew from London writes:
One aspect of the UK market that I thought you might find interesting in (addition) to your commentary is the extent to which 2019 was a year of two halves. I’ve broken the numbers down which suggest in H2 UK was just toying with the “take off point” you describe at a 4-6% level.
Andrew is quite right. According to his review, sales of plug-in hybrid vehicles (PHEV) jumped 32% in the 2H of 2019, from 14,923 to 19,811 units. And pure electrics soared by 116% in the 2H of 2019, from 11,975 to 25,875 units.
How are the details looking so far Q1 2020, in the UK market? The total market is hurting of course, down 31%. But EV sales soared nevertheless, with PHEV up 59% and pure electrics up 204%. Needless to say, these growth figures will not be sustained as we head deeper into the year. But it does prove out Andrew’s point: in the United Kingdom, the switch was flipped for EV starting in the back half of last year.
The update to Oil Fall has been pushed back to May, due to disruptions both macroeconomic and personal. Just to remind: it matters not when you read the current edition because all readers will receive their update for free, incorporated into the new release.
The greatest analytical challenge for observers of the oil market will be gauging how sustainably the pandemic and its crisis will bring forward the peak of global oil consumption. There is no question the very deep lows of oil demand this quarter, and the depressed demand sure to obtain the rest of the year, will be greeted with an enormous bounce back when the global economy starts lumbering back to normalcy. The resurrection will be led by road fuel, as the existing fleet starts its engines.
Answering this question starts with last year’s consumption level: 100.75 million barrels per day (mbpd) according to EIA Washington, and 100.00 mbpd according to IEA Paris. Nota bene: the discrepancy between the two agencies is common and matters little to the question, as either figure is fine to use as the baseline.
From this point forward, one has to input all the trends previously in place, while considering the potential for a recovery that takes substantial time. And then the tricky part: accounting for the changes in habits, technology, and consumption which will surely take place as the global economy recovers. You can already intuit one major dynamic, and it’s an important one: if global consumption takes too much time to crawl back from deep lows, will it ever actually retake the 100 mbpd level if that recovery period is marked by further EV adoption, urban policies that demote cars from streets, and a suite of other initiatives from bans on single-use plastics, to changes in how we commute? While I think we should continue to favor the idea that oil dependency will have a long tail, the industry’s moment of devastation looks permanent.
Let’s end this week’s letter on a lighter note. The Rolling Stones were set to continue their No Filter Tour this coming May, but of course that’s now been cancelled. The outlook for big crowd events is understandably grim. Over the weekend, the New York Times assembled a panel to grapple with the question of when, and how, economies could re-open. Zeke Emanuel, of the University of Pennsylvania, suggested that conferences, sporting events, and yes, large venue concerts were likely to be the last to return, perhaps not until 18 months from now, in the Fall of 2021.
If you’re Mick Jagger, currently age 76, that would mean waiting until age 78 to hit the road again. (Jagger will turn 77 this July). And yet, Mick seems like he’s going to take this all in stride. When the days get tougher, I’m going to turn my gaze to this photo; and in doing so, will remember to try (always try) to make the best use of our most precious resource: time.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
Photos: 1. Tugboat, River Thames London, March 2020, Gregor Macdonald. 2. Oakland Slow Streets Program, April 2020, City of Oakland. 3. EV Charging Station and Black Cab, Bankside, London, March 2020, Gregor Macdonald.
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.
