Morgan Stanley
  • Thoughts on the Market Podcast
  • Sep 1, 2021

The Curious Case of Norway, EVs and Oil

With Martijn Rats and Andrew Sheets


Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheetz, Chief Cross Asset Strategist for Morgan Stanley.

Martijn Rats: And I'm Martijn Rats, Morgan Stanley's Global Oil Strategist and Head of the European Energy Team.

Andrew Sheets: And today on the podcast, we'll be talking about dynamics of oil usage and electric car adoption in Norway. It's Wednesday, September 1st, at 3 p.m. in London.

Andrew Sheets: So, Martijn, you've recently written that there's been some good news on electric vehicle adoption in Norway, hasn't there?

Martijn Rats: Yeah, that is correct. As of July, 64% of all new cars sold in Norway are now electric. Now, the reason why this is important is that if you look at, for example, the plan from the International Energy Agency on how the world can limit carbon emissions such that we stay within the warming degrees that were set out by the Paris agreement. In that plan, electric vehicle adoption plays a huge role in driving down the use of fossil fuels, including oil. In the IEA's plan, the world needs to reach 60% of new car sales being electric. So in a way, Norway has done over the last decades what the world now needs to achieve over the next decade.

Andrew Sheets: Interesting. So Norway's in some ways kind of a leading indicator or an early insight into what type of electric vehicle shifts might happen in the future to hit these climate goals.

Martijn Rats: Look, Norway is a country of just five million people and with very high GDP per capita, but they have various subsidies in place and other incentives to stimulate the use of electric vehicles. And it's had a great effect. And it shows that EVs can reach these percentages.

Andrew Sheets: But, Martijn, despite this pretty ambitious level of electric vehicle adoption in Norway oil demand isn't really going down, is it?

Martijn Rats: That was the surprising effect that we found. To put this in context, by the time global EV sales reach 60% of all new car sales in 2030, according to the Net Zero scenario from the IEA, that will have played a major role in driving down oil demand by a quarter. But that's not really happening in Norway. In fact, what we've seen is that EV sales have seen this very significant increase over the last decade, but it has had almost no impact on the aggregate amount of oil being used. At the moment, Norwegian oil consumption is pretty much unchanged over the last decade despite this big increase.

Andrew Sheets: And what's driving that? Because it's kind of surprising you think this large really kind of a leading shift in electric vehicles and yet little drop in oil demand?

Martijn Rats: Yeah, it's somewhat counterintuitive. We've dived into the details and there are four things that came up. First of all, passenger cars are actually a very modest part of oil consumption. It's about a quarter of oil used being globally goes into passenger cars. And it's about the same in Norway. So we're not talking about all of oil demand. We're talking about a quarter of oil demand. That's one factor. The second factor is that the fleet of cars turns over slowly. So about 64% of new cars sold in Norway is now an EV, but only 10% of the fleet. It takes a while before the market share in new car sales becomes a market share in the aggregate fleet. Then there is the fact that the fleet is still growing, so cars with internal combustion engines might be losing market share, but still of a growing base. So over the last decade, EVs have taken this flight in Norway - which has been very impressive - but the aggregate fleet of cars with internal combustion engines has nevertheless continued to grow and therefore also added to oil consumption. And then finally, what we found is that to the extent that oil used by passenger cars did decline, it was offset by other uses of oil. So we found increased use of diesel, for example, for purposes other than passenger cars. And we've also found significant increases in the usage of LPG, which is a category of oil products typically used in petrochemicals, space heating and those type of things. And these other uses than passenger cars have also helped in keeping oil demand broadly stable over the last decade.

Andrew Sheets: So Norway offers this kind of interesting window into a potential future of greater electric vehicle adoption. But what do you think that means for oil demand in the long run? And where do you think that could surprise?

Martijn Rats: The outlook for electric vehicles is, in fact, very supportive as shown in Norway. But the relationship between oil consumption and EV adoption is a much more complicated one and it works over time horizons that are perhaps much longer than people think. And in that context, it suggests that over time there will be an impact, but it simply takes longer.

Martijn Rats: So the question is not really whether demand for oil will peak. The demand for oil will peak at some point, and that will be a good thing. But the question is, will we have a relatively early peak in oil demand or relatively late peak in oil demand? And also whether the response of the oil industry to this will lead to a relatively early peak in supply or a late peak in supply. Because with current CapEx levels as now being spent by the oil industry, also supply will peak. Now, there are broadly two scenarios, as you can imagine. In one scenario, oil demand peaks relatively soon and supply peaks relatively late. Then it's simply a matter of the oil market will be oversupplied and prices can go to quite low levels. But the way things are currently trending, investment levels in new oil projects are now so low that it seems to us more likely that the peak in supply might be a little earlier than we once thought, whilst examples like Norway showed that the peak in demand might actually be further out. And if we end up in that scenario, we could quite counterintuitively, as the world moves away from oil, be in a situation where for quite a considerable number of years, the oil market could actually turn out to be very tight. And that is the scenario that increasingly we think it's trending towards.

Andrew Sheets: So scenario one is, you know, everybody goes tomorrow and buys an electric vehicle and the oil companies don't adjust and keep pumping and there's just way too much oil sloshing about. But that second scenario, where it's the threat that people over time are going to buy those electric vehicles that cause oil companies today to start adjusting their long-term CapEx plans actually means that oil production peaks a lot earlier than people might expect.

Martijn Rats: Absolutely. The first order effect is relatively simple. EV adoption will over time be negative for oil demand. But the second order effect is how does the oil industry respond to this? And when you put things sort of in time, what will happen sooner, the peak in supply or the peak in demand? And this creates this particularly complicated outlook and the risk of a period of significant oil market tightness right towards sort of the end of the broad oil era might actually have a few surprises for us along the way.

Andrew Sheets: And I think that's so interesting because for a lot of electric vehicle owners or buyers, you might think the big impact you're having is on your own oil consumption. But in some ways, maybe the bigger impact you'll have is on changing how some of these big oil companies think about long term demand.

Martijn Rats: The oil industry is not sitting there and just continuing to do what they've always done. They make investment commitments, which really last sort of 10, 15, 20 years into the future, because quite often a significant part of the oil industry, you know, operates on that time scale. The thing is, if you don't invest in oil fields for production 10, 15, 20 years from now, you don't have that oil field, which also means you don't have the oil in year one, year two and year three. And how that dynamic will play out will be hugely significant for oil markets, the price of oil, which has many other consequences, as you know.

Andrew Sheets: A lot of good stuff to watch. Martijn, thanks for taking the time to talk.

Martijn Rats: Great speaking with you, Andrew,

Andrew Sheets: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today. 

Norway has made great strides in electric vehicle adoption over the last decade, so why has its oil consumption remained largely unchanged?

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