In June 2014, WTI was trading at $105, over 1,800 rigs were actively drilling for oil and gas in North America – life was pretty rosy in the oil patch.  Here we are over a year later with WTI trading at around $45 and only 780 rigs are active as E&Ps try to survive in the new world of ‘lower for longer’ commodity price environment. As technology companies race to change how consumers utilize transportation the impacts to long term refined product demand are still unknown.

Of course the energy headlines put all of the weak WTI price blame on unconventional oil supply growth and OPEC  juxtapose to weaker global demand growth especially in China.  It brings to light the question, is there something else going on in the energy markets that could be responsible for the current correction?  Could it be the market is coming to grips with the fact that the largest refined product market in the world – the US – is on the verge of major technological changes on the demand side?  A glimmer of what the future might look like can be seen by following the news not of Exxon, EOG or EQT but of companies such as Tesla, Uber, Google, Apple, BMW, and Audi to name a few.  Electric vehicles are quickly becoming the real deal and autonomous vehicle technology is progressing in parallel at a rapid pace.

No, I am not saying I believe the end of the internal combustion engine is in sight.  And yes, I still subscribe to the fact that a gallon of gasoline is an amazing combination of energy density and is completely under appreciated by the vast majority of the population in blue states – thank you Robert Bryce, I read all your books.

If we take a step back and look at global gasoline, diesel, and distillate consumption since 1965 by developed countries (by proxy the OECD countries) and the rest of the world (ROW) we see a relentless pace of global refined product demand driven by economic development and global population growth (from about 3 billion in 1965 to 7 billion today).  What is interesting is the OECD member countries’ consumption peaked in 2007 and has been declining.  Going forward, total global refined product demand will be driven forward by further economic development in combination with global population growth (the UN medium global population growth case hits about 9 billion by 2050).

What the hydrocarbon market may need to come to grips with is that the US (and by extension other OECD countries) may see further declines in refined product demand as more and more urban/suburban consumers migrate to the latest and greatest electric car technology.  US refined product demand peaked in 2007 and has declined by roughly 20% as a result of the 2008 recession, hybrids, stricter CAFE standards and Honda Civics that get 38 MPG to name a few.  Adoption of electric vehicles will only accelerate this trend in the US.  Meanwhile US refiners keep running at the same 20 MMbbl/d capacity but export more and more product to the global market – see chart below.

The US has roughly 250 million cars and trucks on the road while the electric vehicle fleet is a fraction of this at approximately 350,000, albeit it grew at over 50% in 2014.  For every one  million new electric vehicles estimates are 700 MW of power generation will be needed.  While this may sound like an opportunity for natural gas electric generation, many states have increasingly aggressive renewable portfolio standards with California leading the charge committing to 50% renewables by 2030.

If you haven’t been paying attention to this electric and autonomous vehicle phenomenon here are some recent headlines:

• Tesla coming to market with lower priced vehicle
• Google’s self driving car project
• Tesla launches autopilot technology
• Apple to have electric car by 2019 – mind you in 2014 Apple had $50 billion in free cash flow while Chesapeake Energy had negative free cash flow of $2 billion
• Porsche introduces electric roadster
• Audi in the electric roadster game too
• BMW going all electric drive for all models
• London urban congestion charge – think exemptions and exclusive areas for electric/autonomous vehicles
• London dirty car tax
• California HOV lane exemptions for electric vehicles
• Uber’s plan to end car ownership
• Uber future impact to urban planning – the end of urban parking
• Uber’s self driving car plans

Implications of which there are many but a few for the US hydrocarbon market:

• US utilities and renewables (wind and solar) may play a larger role in supplying BTUs for consumer transportation driving US refined product demand down further
• US refiners may export elevated volumes into the global market as US refined product market share weakens
• WTI would have to trade at a wide enough discount to Brent to incentivize US refined products exports
• Any electric vehicle technology leapfrogging into the ROW will only further erode global refined product demand

If you don’t believe any of this, grab a millennial and ask them about Uber, Zipcar, living in urban centers and their total lack of interest in owning their own car.  This may sound like pie in the sky but there are some trends here worth watching.  Time will tell.

To get our blog posts as soon as they are published, sign up to follow BTU Analytics’ Energy Market Commentary.