Without a doubt 2014 will go down as a rough year for the oil industry. Crude oil prices plunged about 50% on the year as surging supplies were met with tepid demand. That being said, while demand for oil wasn't as robust as some expected, that doesn't mean the future for oil is bleak. Quite the contrary, as the fuel is still expected to be the world's number one fuel source over the next few decades according to ExxonMobil's (XOM 1.08%) recently updated energy outlook through 2040.
Source: ExxonMobil Corporation.
Transportation drives demand
While oil is a relatively versatile fuel, a bulk of its demand comes from the transportation industry. In the U.S., for example, 46% of oil is turned into gasoline while another 20% is turned into diesel and heating fuel. When we add in the oil that's turned into jet fuel we find that 74% of the oil used in America is used for transportation fuels.
Demand for oil to be refined into transportation fuels around the world is only expected to increase in the years ahead due to population growth and an improved standard of living. We see this in the following chart, which notes rising demand for oil-based fuels to be used for transportation.
Source: ExxonMobil Corporation.
That slide notes that demand growth is expected to be the strongest for heavy duty transportation while light duty demand is expected to weaken over the long term. There are two big drivers causing this notable shift in demand in the years ahead.
Transportation demand is shifting gears
The first shift in demand is the expected drop in demand for oil as a fuel for light duty vehicles. The driving force behind this expected decline in demand is the projected rise in hybrids, which we see in the following chart.
Source: ExxonMobil Corporation.
As that slide notes demand growth for gasoline-powered light duty vehicles is expected to peak by 2030. After that, demand is expected to taper off as hybrids not only begin to replace gasoline-powered cars but also sop up most of future demand growth for new vehicles.
The second shift in demand is much more bullish for oil over the long-term. What we see here is the tremendous demand growth for heavy duty transportation fuel, especially diesel, due to the growth of emerging economies. This dynamic is on display in the next slide.
Source: ExxonMobil Corporation.
In the chart on the left we see that growing economies like China, Mexico, and Turkey are expected to drive most of the growth in demand for heavy duty transportation fuels. Meanwhile, in the chart on the right we see that diesel fuel is expected to enjoy tremendous demand growth over the next few decades as it is expected to continue to be the heavy duty fuel of choice to power 18-wheelers and other heavy duty commercial vehicles. It's this demand for diesel fuel that's almost singlehandedly expected to be what drives demand growth for oil in the decades ahead.
Investor takeaway
While 2014 was a bad year for the oil industry, the future for the fuel source is still strong. Over the next few decades, demand for oil is expected to shift in importance as hybrids take a greater share of the light duty vehicle market. However, even as demand for gasoline weakens, demand for diesel is expected to be robust due to it being the primary fuel of heavy duty transportation vehicles. Suffice it to say, oil might be down, but it's certainly not out as the world's primary energy source.
