In Paris, the International Energy Agency projects global oil demand will rise by 1.4 million barrels per day this year. That forecast is already under pressure, however, partly from Brexit and slower global trade, but mainly from the surge in electric vehicle sales and a slumping auto sector. Combustion troubles revealed themselves last year, and are set to worsen in 2019.

China released January auto market figures last week, for example, and they were as ugly for internal-combustion engine (ICE) sales as they were amazing for EV. Looking at the total market, composed of both passenger and commercial vehicles, sales were recorded at 2.367 million, which represents a 15.8% decline from January of 2018. Meanwhile, EV skyrocketed to 96 thousand, a 137% increase compared also to January of last year.

Importantly, based on the last 6-7 months of data, it appears EV in China are ready to move from a 4.5% market share position last year, to a 7.4% market share position this year, as the total Chinese auto market is set to fall again, this time by 3.5%. Some analysts believe the total market could fall by as much as 5-7% this year, though it’s probably best to avoid those stronger projections—for now. This all said, the future of ICE is quite suddenly in trouble. Not just in China, but in the US, and Europe too.

Meanwhile, the head of the IEA, Fatih Birol, continues to make appearances at global energy conferences, as he’s done over the past three years, passionately explaining the current wave of EV adoption is still too tiny to bring on the end of the oil age. This is of course a straw-man argument, without utility. No one is claiming the world’s EV fleet right now, currently rising above 5 million, is ready to terminate oil dependency. Rather, that EV taking control of auto sector growth brings forward in time two major inflection points: the end of ICE growth, and the end of road fuel growth.

Road fuel consumption in China declined last year, for the first time in, well, forever. Not by much, just -1.17%. But gasoline, gasoil, and diesel consumption fell from 6.4 mbpd to 6.325 mbpd. The same result was seen here in the United States, where gasoline consumption also fell, again not by much, a scant -0.37%. But it was the third straight year gasoline consumption failed to make progress in the US.

Growth, as a concept, is not complicated but there’s a singular truth about growth which often escapes casual thinking: to produce growth year after year, a product must retain all the support it garnered in the previous years, and continually build afresh on that base. Making up losses in one segment or one market, by acquiring new markets or growing new segments is all fine and good. But in that recognition we find another truth: sustaining growth is hard. Most industries and especially the oil industry are not structured to merely serve dependency. Growth itself is an imperative. And sensitivity to growth runs high.

The oil market in the second half of 2018 suddenly had to contend with a new piece of information—growth of oil demand was going to get alot harder if the largest auto market in the world was flipping dramatically away from ICE and towards EV. China sold 1.26 million EV last year, in a total vehicle market that fell from 28.88 million in 2017 to 28.08 million. But at mid-year in 2018, most projections held that EV sales would be just under 1 million, and that the total market would be flat. The change required the oil market to absorb new data too quickly. And in commodity markets that’s never easy.

So if you find yourself wondering how that first wave of EV can affect oil prices and oil demand growth, let’s now consider that China will likely sell 2 million EV this year in a total market that falls again, this time from 28.08 million to 27.15 million. Ah, now it becomes clear. You see, behind those figures is the fact that ICE sales fell last year in China by 1.28 million and are likely to fall further this year, by 1.7 million. That is a non-trivial amount of future oil dependency, forever lost.

There’s a storm brewing for combustion generally, and I’ve been adamant the internal combustion engine (ICE) is on the front line of that vulnerability. Peak ICE is finally getting some recognition, as sales growth has now peaked in a number of critical domains. Let’s list them. The United Kingdom, where EV reached 5.7% of sales last year, and will likely reach 9.7% of sales this year. California, where EV reached 7.9% of sales last year, and will likely reach 13% of sales this year. Please note also, road fuel failed to advance in either the UK or California last year. In the US more broadly the picture has not reached the dramatic stage just yet, as EV sales reached just 2% of market share last year, and should advance to about 3.2% this year. That said, I’m forecasting EV will reach 5% of market share next year in the US. Finally, in Europe, where oil demand did manage to eke out a win last year, moving from 15 to 15.1 million barrels per day, EV reached a level similar to the US, about 2.2% of market share. Again, that is small, but it’s occurring in a market that’s effectively suppressed the growth of oil demand for over 14 years. As EV arrive, the declines will set in.

So contrary to the IEA, for 2019 I’m projecting global oil demand this year could be as low as 0.7 mbpd, half the IEA forecast. Using the IEA sum of parts approach, I’m fine with their view that Africa and the Middle East will each grow by 0.1 mbpd, but, not that the Former Soviet Union states will do the same. Together, that produces net growth of 200 thousand barrels. In the Americas, where IEA projects demand will advance by 0.3 mbpd, I think it will be just 0.1. That gets us now to a 300 thousand barrels of growth. In total Asia Pacific, because of the amazing EV revolution but also the slowdown in broader Chinese consumption, I’m trimming IEA’s growth of 700 thousand to 600 thousand barrels. That takes us up to 900 thousand barrels, or 0.9 mbpd. Now comes Europe, where Brexit, trade concerns, auto sector struggles, and the arrival of EV will, in my view, turn IEA’s forecast of a 100 thousand barrel gain, into a 200 thousand barrel decline. That results in a net 700 thousand barrel advance this year, or 0.7 mbpd.

Note also how far we’ve come from the days when global economic growth typically required 2% to 2.5% annual growth in oil demand. In the current era, we’ve already retreated to the sub 2% level, oscillating between 0.75% and 1.75% oil demand growth. The tipping point which I expected in 2020 has arrived early, meanwhile, as the door is now closing on ICE. Here’s a brief passage from Part II of the Oil Fall series, China Sudden Stop, released in August of 2018:

“The time is rapidly drawing near when ICE vehicles will entirely cede marginal growth to EV and this is already the case in the United States, where ICE sales growth is falling. The position of the Oil Fall series is that by the time ICE sales might be ready to grow again, in 2021, it will be too late for ICE everywhere, and not just China.”

Not a car advertisement, but I couldn’t help notice the imminent arrival of the Hyundai Kona, and the possibility this 100% pure battery electric vehicle (BEV) will take the US market by storm. As readers are surely aware, the compact crossover class is wildly popular here, especially among families, where an elevated seating platform and a hatch-back provides the utility of an SUV but in a much smaller frame. Just guessing, but Hyundai must have assessed the initial rollout of EV across a number of markets, and, may have concluded a traditional sedan, like the Tesla Model 3, was not the best way forward in the US. Reviews have been quite positive on both the Kona’s price, and its range: an incredible 258 miles. InsideEV noted the favorable price to miles ratio, with respect to the effective cost after a federal rebate. But the larger point is this: adoption take-off points occur through some combination of affordability, utility, and yes, cultural preferences. EV are competing already on total-cost-of ownership but in my view what the US EV market really needs to explode higher is a fully electric crossover that runs the family around all week, looks good in the driveway, and has those utility features Americans now clearly prefer. I think Hyundai should prepare for an upsurge of interest in this vehicle (pictured below). And, for our purposes, whether its the Kona or a similar model from another maker, a breakthough offering is imminent and when it arrives, it will make Tesla’s sales so far look like a small cut. Indeed, upon further reflection, I am surprised Tesla has not yet figured out this truth: Americans hate sedans.

Long term forecasts from energy companies are usually best ignored but you might want to peer closely at Energy Outlook 2019 released by BP, earlier this month. In short, BP admits the era of oil demand growth is coming to an end—though you’d have to geek out a bit, and get into their spreadsheet, to discern that forecast. (Cynics have already concluded BP is using the outlook this year to both obfuscate oil’s future prospects to investors, but also to protect itself from future claims.) So that you don’t have to wade through PDFs and Excel spreadsheets, here is the picture. First, BP admits the average annualized growth rate of global oil demand will be just 0.3% from 2017 to 2040. Second, BP also admits that OECD demand, after a small nudge up this year, will decline steadily, falling by 22.5% from 2017 to 2040. Third, BP projects that Non-OECD demand will heroically neutralize the losses of oil’s market share in the OECD, by rising 34.4 % to 2040. But here is the key takeaway: BP frontloads the demand growth of the Non-OECD’s biggest player, China, between now and 2025. Amazingly, BP projects that 93% of the tepid China demand growth it expects to 2040, at just 0.8% annualized, will occur by 2025. Essentially, led by China, BP has whittled down the growth prospects of the global oil industry to just the next 5-6 years. That’s right. BP is projecting 78% of the oil demand growth expected globally to the year 2040 will occur by 2025. They don’t say it out loud. But it’s right there, in the spreadsheet.

Here is my thought: we have a trailing assumption, and with good reason, to assume Non-OECD oil demand growth will make up for OECD no growth in the years ahead, because that’s been the story the past decade. But what if—hear me out— the downside risk to demand growth is now much greater in the Non-OECD, led as it is by China? Based on this BP release, and my ongoing conversations with people connected to the oil complex, I’ve now concluded the spectre of no-growth is quietly being incorporated into the oil industry, despite the brave faces.

—Gregor Macdonald

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.