Europe's Surging EV Sales Are Oil's Next Challenge

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If a Covid-caused fuel-demand collapse hasn’t been bad enough for Europe’s oil refineries, they are now facing yet another jolt to profitability: a world-leading shift to electric vehicles.

The continent’s electric car purchases surged 142% to 1.4 million in 2020, surpassing China as the top buyer, according to the International Energy Agency. Even last year, when mobility tumbled because of the pandemic, EVs managed to erode oil refiners’ share of the continent’s road-fuel market.

The vehicles’ oil market impact -- though small for now -- is widely anticipated to grow. At the end of the decade, electric vehicles will account for almost 10% of the continent’s road-fuel demand, BloombergNEF estimates. That would be equivalent to the entire output of about five mid-sized European refineries.

“We can see, even by 2030 and 2035, that the demand for our traditional products will be very significantly lower,” said John Cooper, director general of FuelsEurope, which represents European oil refiners. He sees a future for the sector in low-carbon liquid fuels: namely, biofuels and synthetics, though output will be much smaller than today’s petroleum market.

Europe's Surging EV Sales Are Oil's Next Challenge

Almost 13% of OECD Europe’s oil demand evaporated last year as Covid-induced lockdowns ground much of the continent to a halt. The crunch, which was particularly tough on jet fuel, hit refiners’ profits hard. Since the start of last year, closures at plants in Belgium, the Netherlands, France, Portugal, Finland and Norway have been announced.

While there will be a slight recovery through 2023, Europe’s demand for fossil-based liquid fuels -- think oil products like gasoline, diesel -- as well as biofuels, will never again reach the heights of 2019, according to Wood Mackenzie Ltd., a consultant. The IEA sees it similarly, expecting the continent’s oil demand growth to turn negative in 2025, when it will still be shy of the pre-pandemic level.

Europe’s refining margins have now recovered from the lows of the pandemic, but are still below the five-year average, according to Wood Mackenzie.

Future Fuels

Today, biofuels -- which help to make fossil-derived products like gasoline -- account for a much bigger chunk of Europe’s road fuel demand than electric vehicles. But their market share will only rise slightly this decade, as only so much bio-component can be blended into the liquid fuels used in vehicles’ engines.

In the long run, biofuels’ share of European road-fuel demand is actually set to slump, weighed down by the general decline in liquid fuels as EV’s -- backed by EU policy -- take an ever bigger piece of the pie.

“The cost of an EV will fall below the price of an internal combustion engine vehicle, on an upfront basis, from the late 2020s,” said David Doherty, oil demand specialist at BloombergNEF. “Consumers will likely adopt EVs en masse over ICE vehicles as a cheaper option.”

The future of other transport sectors is less clear. Uptake of sustainable aviation fuel -- a cleaner version of fossil-based jet fuel -- is currently extremely low, while hydrogen and electric airplanes are still in the very early stages. The maritime sector is also making slow progress on decarbonization.

Trucking also accounted for about 40% of Europe’s diesel demand before the pandemic hit. That won’t disappear overnight. For the long-distance, high-C02 portion of the sector, hydrogen, or, electric overhead wires are in play as decarbonization solutions, according to Cooper. But a significant chunk of the trucking industry supports liquid fuels. And that bodes well for refiners.

Trouble Ahead

Even with the pockets of demand that remain, Europe’s refiners will still face a barrage of imports from East of the Suez Canal, where new refineries keep getting built. Not only will these plants sell into Europe, they are also likely to eat into the continent’s export markets.

Europe’s refining sector will ultimately be whittled down to the most competitive sites, according to Alan Gelder, vice president, refining, chemicals and oil markets at Wood Mackenzie. Those left will be the plants integrated with chemicals. Facilities in industrial clusters are also set to benefit.

“Long term, the need for refining in Europe is going to decline,” he said.

©2021 Bloomberg L.P.

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