Aurora Energy Research report suggests widespread digitisation and electrification may soon spell big trouble for coal and oil
The rapid shift towards renewables and electric vehicles (EVs) could lead to peak oil demand as soon as the mid-2020s, resulting in a huge $19tr of lost oil company revenue over the next two decades, a new study by Aurora Energy Research has warned.
Analysing current structural shifts in the production and consumption of energy, the report points to how widespread digitisation and rapidly growing consumer preferences for low carbon electricity and e-mobility could have a potentially devastating impact on fossil fuel commodity markets.
Released yesterday, it presents a fossil fuel 'Burnout' scenario in which widespread electrification of transport could put 540 million electric vehicles on the road by 2040, with greater use of digital technologies and 'internet of things' services also increasing demand for electric power.
The study comes in the same week as similarly bullish projections from Bloomberg new Energy Finance suggested that EVs will undercut conventional cars in terms of both running and upfront costs during the 2020s, paving the way for explosive growth across the sector. It projects that global EV sales will climb from 1.1 million units last year to 11 million in 2025, 30 million in 2030, and 60 million in 2040, leading to a combined 7.3 million barrels of oil demand a day being displaced by 2040.
The Aurora report details how when rising EV demand is coupled with improvements in fuel efficiency, oil demand could start to decline from the 2020s onwards, cutting oil consumption revenues in real terms from $1.5tr in 2016 to $1.1tr in 2040.
In addition, it argues that the global low carbon energy revolution will see coal prices collapse by 2040 to "barely above the marginal cost of production and transport", with total fossil fuel revenues crashing by 40 per cent by 2040 compared to a business-as-usual scenario.
Overall, the study estimates cumulative fossil fuel revenues could be as much as $21tr lower between now and 2040, with 90 per cent of the decline in the oil markets and the remainder impacting coal.
Such findings contrast markedly with the forecasts of several oil majors and the International Energy Agency (IEA), which generally maintain that demand for oil is likely to continue growing for several decades to come.
However, Aurora Energy Research - which was founded by influential energy academic and government advisor Professor Dieter Helm - argues ongoing trends towards low carbon and digital technologies will likely have an "enormous impact" on those companies and economies that are reliant on oil and coal.
Richard Howard, the analytics firm's head of research, said the findings pointed to significant challenges ahead for current fossil fuel business models and investment plans.
"Our new analysis points to a possible energy future of mass electrification, digitalisation, and new technologies, in which the rise in electric vehicles and continued improvements in fuel efficiency lead to peak oil demand occurring in the mid-2020s, and oil prices falling to less than half their current level by 2040," he said. "Indeed, this flips the very idea of 'peak oil' - previously hypothesised for the supply side - as electricity grows in importance as a transport energy source."
Elsewhere, the findings suggest natural gas may emerge as a key fossil fuel "winner" in the coming decades, playing an important role in balancing renewables on the grid as well as acting as a substitute for oil in the petrochemicals sector. Indeed, it estimates long term gas demand could actually increase by around 15 per cent between now and 2040 relative to business-as-usual.
The report also claims to "challenge commonly held assumptions about the role of policy as the principle driver to combat climate change", suggesting consumer demand will drive the shift at least as much, if not more so, than regulations or targets.
Under the scenario presented in the report, the shift from oil and coal towards gas and renewables will mean total CO2 emissions from fuel use are seven per cent lower than a scenario in which the Nationally Determined Contributions set out by governments under the Paris Agreement are achieved, and almost 25 per cent lower than a business-as-usual scenario, according to Aurora.
As such, the report contends government and climate policies "should be at least as much about spurring technology and consumer engagement as they are about target setting or carbon pricing".
"Gas and power will become increasingly important energy vectors in the future, whilst the shift away from coal power generation in many nation states leads to a collapse in coal demand and prices," predicted Howard. "Taken together, these trends could reduce the revenues of fossil fuel producing companies and nations by more than $20tr between now and 2040, compared to a business-as-usual scenario. At the same time, our analysis suggests that these rapid technological shifts are likely to prove more effective in combating climate change than the national carbon targets set under the Paris Agreement."
With many oil majors already facing pressure from increasing numbers of investors on climate risk at their AGMs over the coming weeks, Aurora's latest study will make for sobering reading among fossil fuel executives and asset owners alike. After all, long term investors in coal and oil may soon start to find their investments going against not just decarbonisation policies, but consumer trends as well.
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