Oil's resilience: Defying decline amidst electric vehicle surge, global demand hits record highs

The global appetite for oil is set to reach an all-time high this year, with purchases growing by nearly 40 per cent. Battery electric vehicle (BEV) adoption, expected to make up over 10 per cent of global auto sales, has not curbed oil consumption.

According to a report by Morgan Stanley, the dichotomy between the rise in electric vehicle purchases and increased oil demand challenges conventional expectations.

Norway, boasting the highest EV penetration globally, serves as a compelling case study. Despite EVs constituting 80 per cent of new auto sales, the country's oil usage has not collapsed.

Similar trends are observed in China, the largest EV market, where oil demand surged by 50 per cent alongside EV penetration reaching over 20 per cent. The critical factor overlooked by many is that road transport comprises less than half of global oil consumption.

Contrary to popular belief, road transport represents only part of the oil consumption picture. Sectors like jet fuel, petrochemicals, and industrial/residential heating contribute significantly to global oil demand.

The International Energy Agency (IEA) projects the petrochemical sector to be the primary driver of future oil demand. Jet fuel demand is also expected to grow as airline travel returns to pre-pandemic levels.

Energy transitions unfold over decades, and a historical review reveals that new technologies take time to achieve dominance.

Currently, fossil fuels account for over 80 per cent of primary energy consumption, while solar and wind make up just over 5 per cent.

Government policies promoting a shift toward net-zero emissions and the adoption of cost-efficient renewables will alter this balance gradually.

While oil's share of the energy mix has diminished from 40 per cent in 1965 to less than a third today, overall energy consumption has more than tripled.

Predictions of a collapse in oil demand are considered too pessimistic. Global oil demand is on track to hit record levels by the end of the year, driven by stronger-than-expected global GDP growth and improved jet fuel demand.

Major oil producers, including OPEC and Russia, have responded cautiously to increased demand. Underinvestment in oil production poses a serious concern, as the global capital expenditure for exploration has halved from its 2014 peak to less than USD 400 billion in 2022.

The International Energy Agency (IEA) warns of potential global oil supply shortfalls by 2030 if investment levels do not increase.

Historically, oil prices oscillate between the marginal cost of new supply and the cost of demand destruction. Energy equities, although attractively valued, face scepticism from investors, with their share in global equity market capitalization declining.

The industry's shift toward a more investor-friendly capital allocation approach, coupled with high normalized free cash-flow yields, suggests substantial potential gains, particularly if companies maintain capital discipline in a high oil price environment.

While energy transition is underway, a rapid decline in oil demand appears distant. The current levels of investment fall short of meeting potential oil demand growth, pointing toward a compelling outlook for energy equities amid a period of "tighter for longer" oil market conditions.

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