Key Factors Driving The Global Demand For Petroleum Fuels

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Petroleum fuels make up almost one-third of the global energy demand. These fuels primarily include gasoline, diesel, jet fuel, kerosene and fuel oil. More than 55% of the global demand for petroleum fuels comes from transportation. The remaining 45% demand comes from industrial and power generation sectors with the latter contributing just around 5%. Most of the growth in demand for these fuels is expected to come from the transportation sector. This is because the global demand from industrial and power sectors is expected to remain largely stable in the long run, as the growth in demand from developing nations is expected to be mostly offset by the decline in developed nations. However, growing economic activity and vehicle ownership in the developing nations is expected to drive significant growth in petroleum fuels demand for transportation, which would be partially offset by improvements in vehicle fuel efficiency and the growing use of alternatives such as natural gas and biofuels in the transportation sector.

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Growing Economic Activity And Vehicle Ownership In Developing Nations

Transportation accounts for more than a quarter of the global energy demand. Liquid petroleum fuels including gasoline, diesel and jet fuel currently meet almost all of this demand. More than 80% of the demand for transportation energy comes from road transport. It includes the use of light-duty vehicles, such as automobiles, sport utility vehicles, minivans, small trucks, and motorbikes, as well as heavy-duty vehicles, such as large trucks used for moving freight and buses used for passenger travel.

Growth in economic activity and population along with vehicle fuel efficiency are the some of the key factors driving global transportation energy demand. Going forward, we expect the growth in transportation demand to primarily come from developing nations, especially China and India, where faster economic growth is improving standards of living, which is resulting in higher demand for personal travel and freight transport. Better living standards spur growth in consumer demand, which generally translates into higher industrial output. Industrial growth increases the movement of raw materials and manufactured goods, which increases the demand for transportation fuel.

Not only this, faster economic growth and industrialization also results in higher personal incomes and urbanization, which is expected to drive higher vehicle ownership in the developing nations. Currently there are around 20 and 80 vehicles per 1000 population in India and China, respectively. This compares to almost 800 vehicles per 1000 population in the U.S. and almost 600 vehicles per 1000 population in Germany and Japan. Therefore there is significant scope for growth in vehicle ownership in the developing nations. BP expects the global vehicle fleet, which includes commercial vehicles and passenger cars, to more than double to 2.3 billion units by 2035 from just around 1.1 billion units now, with a majority of growth (~86%) coming from the developing nations. [1]

Improving Vehicle Fuel Efficiency

Improvements in vehicle fuel efficiency has been a key factor responsible for the decline petroleum fuel demand in developed nations. Light vehicles in the U.S. used to burn more than 15 liters of petroleum fuels per 100 kilometers in 1975, which compares to an average of less than 10 liters of fuel consumed today for the same distance. This is expected to decline further with technological improvements to just around 5 liters per 100 kilometers in the long run. The EIA therefore expects total liquids fuel consumption in the U.S. to decline slightly over the 30 year period ending 2040, as the agency expects gains in vehicle efficiency to more than offset increased transportation demand. [2]

Growing Use of Natural Gas and Biofuels

Apart from this, growth in alternatives such as natural gas, biofuels and electricity are also expected to drag down petroleum fuels demand in the long run. The use of natural gas in transportation is primarily expected to be fueled by low natural gas prices in the U.S. While the average price of diesel is above $4 per gallon, the same amount of CNG (gallon gasoline equivalent) can be bought for almost half the price in the U.S. [3] The efficiency of a machine in converting either of these fuels into power is also an important factor and does partially offset the price advantage of CNG over diesel in some cases. However, this particular CNG-powered Freightliner provides operational gains over the traditional fuel despite having around 10% lower fuel efficiency compared to its diesel alternative.

Natural gas vehicles also offer a significant opportunity to reduce green house gases emissions. According to the Center for Climate and Energy Solutions, the use of LNG and CNG as alternatives to diesel can reduce carbon intensity (the amount of carbon by weight emitted per unit of energy consumed) measured in gCO2e/MJ by 13% and 29% respectively. The same study suggests that reductions of conventional air pollutants from natural gas vehicles are also significant. [4]

However, the absence of a robust fueling infrastructure for CNG has been the most prominent factor dampening the rate of adoption of natural gas powered vehicles. Including both public and private, the total number of CNG fueling stations in the U.S. stands at 1290. This compares to about 180,000 gasoline stations. [5] Apart from this, high initial costs of LNG/CNG vehicles as compared to their gasoline alternatives have also negatively impacted their demand. Currently, LNG powered tractor-trailer trucks cost around $75,000 more than the ones that run on diesel. However, we believe that increasing mass production and competitive forces are expected to drive this premium down in the long run as these products gain wider acceptance. FedEx CEO, Frederick W. Smith expects up to 30% of long-distance trucks to be powered by liquefied (LNG) or compressed natural gas (CNG) over the period of next 10 years. [6]

Not only this, high crude oil prices, government mandates on the use of biofuels due to increased focus on reducing carbon emissions as well as improving energy security, and cost reductions driven by technological advancements are also fueling rapid growth in the biofuels market. More than 50 countries, including some developing countries as well, have already adopted biofuels blending mandates and targets such as the Renewable Fuel Standard in the U.S., where biofuels make up more than 7% of the total transportation fuel consumption. [7] Currently, biofuels account for just around 2.5% of the total transportation fuels demand. However, this is expected to almost double to around 5% in the long run. [8]

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Notes:
  1. BP Energy Outlook 2035, bp.com []
  2. International Energy Outlook, eia.gov []
  3. U.S. Energy Information Administration, eia.gov []
  4. Natural Gas Use In the Transportation Sector, c2es.org []
  5. Alternative Fueling Station Counts by State, energy.gov []
  6. FedEx Truck Fleets To Shift To Natural Gas From Diesel, hydrocarbonprocessing.com []
  7. U.S. Bioenergy Statistics, ers.usda.gov []
  8. Renewable Energy In Transport, iea.org []
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