48 volt mild hybrid systems about to drive higher auto fuel efficiency, slowing global oil demand

In talking with the bigger oil and gas companies, more efficient ICEs (internal combustion engines) will definitely have the biggest impact on oil demand today compared to BEVs (battery electric vehicles) just because of the volume difference. A new generation of vehicles that is 10% more efficient is far more impactful to their bottom line than 1% or 2% of new vehicle sales using no gasoline at all. – Chris Robinson, senior analyst, LUX Research.

The energy sector is preparing for Peak Oil Demand (Wood Mackenzie says it will arrive in 2036). Slowing consumption of crude oil is driven by the ever growing efficiency of gasoline and diesel-powered vehicles. The next jump in auto efficiency will be an innocuous little technology called the 48 volt hybrid system.

Volkswagen’s new 48 volt mild hybrid system.

The system consists of a 48 volt battery, a convertor, and an electric motor that replaced the alternator and is integrated into the engine to assist with propulsion. Mild hybrid is cheap (around $1,000) and provides an approximately 15 per cent boost to vehicle efficiency – higher mileage with fewer emissions. Robinson thinks future iterations will improve efficiency even more.

“It really depends on what electrical loads in the vehicle you move from being belt-driven to electrically powered and how much energy/power your battery system provides. Today the upper end is roughly 15%, but if you are really aggressive and move a lot of loads over to the 48 volt system, you can probably push that to 20% to 25%,” he said in an email.

Volvo created quite a stir last year when it cleverly announced it was electifying all its models by 2019, leading many to think the Swedish automaker was transitioning to full BEV production. Not the case, says Robinson.

“Volvo didn’t announce it will stop using internal combustion engines, rather that all vehicles will be at least equipped with 48 V mild hybrid systems, which are expected to gain significant traction over the next five years in Europe and China as OEMs strive to meet emissions and efficiency requirements,” he said.

“It’s not an entirely bold claim to say you are moving to 48 volts on all vehicles – it’s earlier than their competition but the automotive industry seems to be moving in that direction. It’s an aggressive target from a smaller company, but also only a few years ahead of what others like Daimler or Volkswagen have announced publicly.”

Ed Rawle, economist and lead author of Wood Mackenzie’s pead oil demand study, believes fuel efficiency measures will kill 2.5 million b/d of crude oil demand by 2030 and 5.5 million b/d by 2040.

“We think fuel efficiency is absolutely important and it’s the biggest driver of oil demand displaced or lost oil demand to 2030. Beyond that, electric vehicles have a bigger impact, especially if you look out to 2035 or 2040,” he said in an interview.

Robinson agrees that mid-2030s is likely to be when pure electric vehicles really take off.

“Lux’s forecast is that the plug-in vehicle inflection point – the point at which more than 50% of new vehicle sales are plug-ins – will occur between 2035 and 2040,” he said.

Until then, expect to see automakers to adopt a two-pronged strategy to fuel efficiency: pushing 48 volt mild hybrids to achieve short-term fuel efficiency targets, while also continuing to develop BEVs, which will benefit from a five per cent annual improvement in performance and costs, according to Energi News experts.

“We should be thinking of 48 V hybrid technology as a transitional technology that can offer significant improvements to the efficiency of the combustion engine before EVs are a more mature and affordable option,” says Robinson.

“I don’t think we should think about electrification as an either or scenario – most automakers are focused on developing more hybrid vehicles and plug-in vehicles for the future.”

He points to Ford’s strategy in the US as a good example of the trend.

“Since they are dropping many of the more efficient sedans and hatchbacks from their lineup, they’re going to be focusing significantly on hybridizing their larger SUVs and trucks, and even the Mustang,” he said.

“Concurrently, they are releasing their first real effort in the EV space by the end of the decade while their Team Edison looks to develop that into even more models.”

Electrification of transportation, both from mild hybrids and BEVs, will start in the developed economies, says Rawle.

“Outside of China, the US and Europe, we do not see a whole lot of electrification. There will be electric vehicles in those places but it’s minimal numbers by 2040,” he said.

“Even if we were to switch to electrics vehicles tomorrow globally, you still have an enormous fleet of 1.2 billion vehicles that are already running on internal combustion engine technology.”

As a result of increasing electrification during the next decade, Wood Mackenzie forecasts global gasoline consumption to peak in 2030 and diesel in 2035. But Rawle also acknowledges there is considerable uncertainty about the impact the new technologies will have on demand and the big oil companies are busy strategizing to remain competitive under any number of oil consumption scenarios.

“What companies want to understand is where they sit on the cost curve delivering those 109 million barrels (Wood Mackenzie’s predicted peak demand in 2036),” he said.

“Then they want to understand the risk of that number being 100 million barrels or maybe 118 million barrels by 2040, and where they sit on that cost curve in that world.”

The lesson for Canadian oil producers, especially in Alberta, is that new technologies are (perhaps quite rapidly) changing demand for their product. As I’ve demonstrated in other columns, the oil sands producers are aggresively driving down production costs and the carbon-intensity of their heavy crude oil in order to be competitive in an uncertain future.

Are other producers? That remains to be seen, but the political discussion around provincial and federal energy policy suggests not.

Promising to return to policies that were successful in the past seems like an irrational choice in the face of the momentous technology changes about to transform global markets.

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