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We released our Oil Black Book in September and our two key underlying themes related to flat lining production globally and the fact that increased investment does not seem to be growing production.  While these are the important facts relating to supply, on the demand side we do need to seriously start considering the impact of more fuel efficient vehicles, particularly in the United States.

The United States uses roughly 20% of the world’s oil and roughly 50% of that is used for gasoline for cars.  As a result, any real change in gasoline usage for transportation in the United States will impact global supply and demand dynamics directly.  We wrote the following in our Black Book:

“In aggregate, oil accounts for almost 95% of all transportation energy around the globe. This is the single most substantial area for potential demand alleviation as fuel intensive transportation methods begin to be gradually displaced by more economical modes of transportation. As an example, Fisker Automotive is expected to introduce a car shortly that will get upwards of 65 miles per gallon. Tesla, GM and Nissan also are in the midst of introducing cars that may get upwards of 100 miles per gallon, although it is not yet clear that these cars will see wide spread use as the mpg calculations are based on limited daily use. Nonetheless, this advancement could lead to a dramatic increase in average miles per gallon which is currently estimated to be in the ~24 mpg range in the United States.”

The reality is that based on hybrid vehicle technology, the MPG in the United States has the potential to change dramatically over the coming years.  Estimates suggest that globally, hybrid sales are still barely over 1% of all vehicle sales.  In a scenario, whereby hybrids reach 5, 10 and even 15% of vehicle sales in the United States that would have a meaningful impact on average MPG, and overall demand for oil.  In the table below, we have outlined a scenario where the base of cars becomes increasingly more hybrid and operate at a MPG of 50, which is comparable to a 2010 Prius. Let’s take a look at the rough math:

Hybrids Impact on Oil Demand - hybrid table

The punch line is that as hybrids continue to take market share, we can and will see a dramatic decline in oil demand in the United States as it relates to gasoline use.  At a point when 15% of all vehicles are hybrid, MPG will increase by 16.3%, so vehicles will be that much more efficient.   The implication is that, all else being equal, 50% of American demand for oil will decrease by 16%+ when hybrids are penetrated to 15% since 50% of oil used in the U.S. is turned into motor gasoline.

To put this in a frame of reference, gasoline demand over the past ten years from October 1999 to October 2009 has only increased by 8.3%, so to the extent that some of the general estimates relating to hybrids are accurate, namely that 20% of all car sales by 2020 will be hybrids, we could potentially see a dramatic decline in gasoline demand in the U.S. that offsets natural organic growth in demand.  In fact, over the last decade, we would have actually seen a net decline of demand of ~8%.  Keep your eyes on the hybrids!

Daryl G. Jones
Managing Director