There seems to be a big misconception on the future of oil demand in the world. There is a misguided belief that the electric car, or really just fuel efficacy in general, will eliminate much of the world's demand for oil. However, that couldn't be farther from the truth. Oil is not going away. Because at the end of the day there is one huge trend that will drive future demand for oil. And, that's diesel demand from emerging markets.
Tapping the brake on gasoline demand
The world actually is poised to curtail its insatiable demand for oil used to power light duty vehicles like cars and trucks. A combination of fuel efficiency gains and the emergence of hybrids and electric vehicles will more than offset future demand growth from emerging market economies as well as overall population growth. Even oil companies like ExxonMobil (XOM +2.73%) readily admit that this trend is coming, which why it projects that the world see declining demand for oil used in light duty vehicles starting as soon as the next decade.
Source: ExxonMobil Corporation
As the chart on the right notes, the energy savings from fuel efficiency will really curb demand for the oil used by cars and trucks. A lot of this does have to do with the projected growth of electric cars, especially hybrids. We see this in the following chart as these vehicles are expected to lead to less gasoline cars being on the road by 2040 than will be on the road by the start of next decade.
Source: ExxonMobil Corporation
However, while hybrids will lead to tame gasoline demand, it won't tame overall demand for oil, nor will it halt demand growth. Instead, demand for diesel will hit the accelerator and be the single biggest driver of oil demand in the decades ahead. Overall, the International Energy Agency sees demand for diesel growing three times faster than gasoline demand.
Shifting gears
Driven largely by heavy duty transportation, think 18-wheelers, the world's emerging economies are expected to have a nearly insatiable demand for diesel. We see this in the next chart, which estimates that the amount of oil needed to be refined into diesel is expected to more than double over the next few decades.
Source: ExxonMobil Corporation
Overall, diesel is the single largest growth driver for oil demand in the future and it is the reason why overall demand for oil is expected to grow by just under 1% per year. While that might not sound like a lot, it's over a very, very large base and it equate to billions of barrels of new oil supplies needing to come online in the future representing trillions of dollars in future investments.
The reason why diesel will be so important in the future is that there simply isn't a substitute that can provide the cost effective power needed to get 18-wheelers and other commercial vehicles from point A to point B. This is because the only real switching option for these heavy duty vehicles is natural gas. And while natural gas might be cheap and abundant in America, that's not the case overseas. Further, the fuel has a very high switching cost to overcome as the engines are expensive, which is why its growth in North America has been slow. Because of this there simply is no viable alternative, at least as far as the eye can see at the moment, to displace diesel as the fuel heavy duty trucks need to drive the growth of emerging market economies. This is why oil isn't going to go away any time soon.
Investor takeaway
Gasoline demand might be slowly killed off by the emergence of the electric car. However, it's abundantly clear that oil is still going to be a key fuel in the decades ahead. That is because there's nothing yet that can displace it out of 18-wheelers in emerging market economies, which are almost singlehandedly driving demand for oil in the future.
