UK ban of petrol and diesel cars to massively impact oil sector

17 August 2017 6 min. read
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The UK government has made plans to ban the sale of new petrol and diesel cars by 2040 – something already cited as having led to a steep decline in the sale of diesel vehicles already. According to Alan Gelder, a senior vice president at Wood Mackenzie, this will also have major impact on the refining sector and the oil markets.

The UK's new car market continues to shrink, with new car registrations down 9.3 per cent in the month of July, according to the latest figures from the Society of Motor Manufacturers and Traders. Last month saw 161,997 new cars registered in the UK, down from 178,523 compared to July last year. The total registrations for the year have now reached 1,563,808, representing a 2.2% fall from the first seven months of last year. Diesel sales have meanwhile taken the biggest fall of 20.1% for the month of July in which the government’s proposed ban of petrol and diesel vehicle sales, while falling 11% for the year in total.

In July, Britain’s government announced plans to ban all new petrol and diesel cars and vans from 2040, amid fears that rising levels of nitrogen oxide pose a major risk to public health. The plans, which followed a similar commitment from the new French government, came as part of the government’s much-anticipated clean air plan, which has recently been at the heart of a protracted high court legal battle. Ministers believe air pollution poses the largest environmental risk to public health in the UK, costing up to £2.7 billion in lost productivity in one recent year.

While Ministers have continuously ruled out clean air zones, which would levy punitive taxes against vehicles with major emission outputs like diesel vans, petrol and diesel vehicles seem to be experiencing a major public divestment in anticipation of such measures.

While diesel car sales continue to decline, alternative fuel car registrations rose by 64.9% in July and are up 31.4% for the year. Alternative fuel vehicles now have a record high 5.5% market share in the UK. According to the most recent figures published via the Office of Low Emission Vehicles meanwhile, there are over 100,000 hybrid and pure electric vehicles on UK roads at time of writing. Forecasts vary on how quickly this figure may climb in view of the government’s new tact, however distribution network operator Western Power Distribution recently predicted it will hit 1 million by 2020.

Thanks to the renewed interest in the technology, high profile firms like Tesla will be rolling out its cheapest model into the UK next year. Meanwhile, Volvo are pledging to produce electric vehicles (EVs) and hybrids only by 2019, and a recent study by Baringa Partners also suggested the tide could be turning for electric vehicles in that case. According to a recent statement by the Renewable Energy Association’s Matthew Trevaskis, head of electric vehicles at the organisation, the product cycle for new vehicle from research to launch is generally seven years, which means that soon the automotive industry will collectively be planning for petrol-free vehicles. Experts predict at that point, the pace of change will quicken even further.

UK ban of petrol and diesel cars to massively impact oil sector

According to Wood MacKenzie, a global consultancy specialising in energy and renewables among other things, electricity demand from the uptake of electronic and hybrid vehicles will reach 12 TWh or 3% of total electricity demand in the UK after 2025, requiring over 400,000 new public charging points at an investment cost of over £30 billion.

Alan Gelder, Wood Mackenzie’s senior vice president of refining and chemicals research said, “Sales of BEVs are expected to ramp up quite considerably after 2025, with one in three cars sold in the UK by 2035 expected to be fully electric (with typical new car sales over 2 million vehicles per year). By 2035, we expect the remaining internal combustion engine (ICE) passenger fleet will continue to consume over 6 million tonnes of gasoline and 7 million tonnes of diesel per year.”

This could result in a 40% reduction compared to the amount of fuel consumed by cars today – although due to growing demand from commercial vehicles and airlines, the total reduction in UK oil demand is projected to be only 20%. The UK currently has over 8000 retail stations, and this is already seeing around 100 close per year, while Wood MacKenzie predict by 2035 only 6000 sites may remain. If the government’s proposal permits only BEVs to be sold post 2040, then the situation will change even further. This could place the national grid under significant strain if action is not taken, however.

Johannes Wetzel, a research analyst in cross-commodity analytics for the firm’s EMEARC division, said, “Assuming that all ICE passenger cars were to switch to BEVs by 2035, electricity demand would increase by 55 TWH to 16% of overall demand, which would be a challenge for power grid stability, so massive investment in flexible power generation, electricity storage and the grid itself will be necessary. Currently peak load on the UK power grid is roughly 53 GW in winter. The introduction of fast charging technology means that EV charging load will rise as well.”

Earlier in the year a McKinsey & Company paper had forecast the approach of peak energy in the UK, as improving electrical efficiency meant less electricity would be needed for domestic and commercial use. However, hypothetically Wetzel and Gelder claimed that in 2035, if 5% of the EV fleet were to charge at the same time, the load on the grid could soar by up to 40 GW – and they therefore suggested the government would need to make massive investment in flexible power generation and electricity storage just to keep the lights on.

Gelder concluded that this is also likely to impact on the oil industry significantly, “The sustainability of the UK refining industry is threatened, as gasoline typically represents one third of the refined products supplied from UK refineries (though currently 20% of UK gasoline production is exported)… The impact on the oil, refining and electricity sectors extends beyond the UK, as if this change is delivered here, it is likely to be replicated across many other parts of the world.”