The International Monetary Fund (IMF) has said that oil “is the new coal” and predicts oil prices will drop to about US$15 a barrel by the early 2040s. As of publication, the average price per barrel of crude oil is US$49.96.
“After examining recent developments in transportation and renewable energy as well as past technology transitions, we conclude that oil as the main fuel for transportation and a major energy source in general could have a much shorter life span than many assume,” the IMF report said.
“Like wood and coal in the past, a demand-driven switch away from oil could happen in not too distant future.”
The fund predicts that the switch to renewable technologies could occur within the next 10 to 25 years as motor vehicles are replaced by electric cars, akin to the transition from horse-driven vehicles to motor cars a century ago.
“With their much lower maintenance and fuel costs, it is hard to deny that electric vehicles could displace a sizable number of motor vehicles in the not too distant future. The question might be not so much 'whether' as 'when',” the IMF said in an accompanying article.
Using the historical data about the transition from horse-driven to motorised vehicles, the IMF predicted that 90 per cent of the stock of cars in advanced economies could be electric by 2040. In emerging market economies electric cars could make up more than half by the same time period.
“But wouldn’t an increase in demand for electricity to power these vehicles give a boost to the market for oil to run generating plants?” the IMF considered in the September article.
“Not really. Oil’s share of the market for electricity generation and heating is already less than 20 per cent globally, and that could shrink further because of the rise of another new technology: renewable energy.”
So what does that mean?
The end of the oil era has “deep implications”, the IMF said, noting that economic models supported by oil-exports in many countries “would not be sustainable in such a world”.
“Even if one believes that the probability of such a future is low, the decline in oil revenues for many oil exporters would be so large that the expected loss would nevertheless be sizable. Such low oil prices would obviously have major implications on the macroeconomic stability, including fiscal sustainability, of these countries.”
The IMF said the “most crucial” point on policymakers’ agendas in oil-exporting nations should be diversification away from oil.
Investing in electric vehicles: Car companies are investing “heavily” in electric car technologies. The IMF pointed to Volvo, which in June pledged to ensure that beyond 2019, all cars manufactured would be electric.
The knock-on effect of electric cars, the IMF added, would be renewables possible replacing other fossil energy resources like coal.
“If the electric car were to take over road transportation, one would expect an increase in demand for electricity to be quite substantial.
Renewables replacing fossil fuels: “Fossil fuels could still play a major role in the electricity generation as does coal today. However, renewables are growing rapidly enough to provide the increasing demand for electricity and potentially replace existing fossil energy sources,” the IMF explained.
Wind power could also come to the fore in spite of the current installation costs, with the IMF noting that installation and maintenance prices should fall as the market grows.
Shift in tax policy: For countries that import oil, the low price could reduce pressure on accounts and could lead to shifts away from taxes on fuel.
Emergence of new job sectors: The transition away from motor vehicles would disrupt both production and maintenance aspects of the auto industry and promote the possibility of on-shore production and maintenance systems.
“Eventually, tens of thousands of jobs in advanced and emerging markets could see a transition into new sectors: power charging networks, battery production, and autonomous driving, just to name a few,” the IMF said.
Limited effects of global temperature rise: “The most important implication of our fast adoption scenario is that the pace at which EVs would replace motor vehicles would meet the conditions to keep global temperature rise below 2 degrees celsius. There is a strong rationale for co-ordinated government intervention to make this transition in transportation even swifter to combat the effects of climate change,” the IMF concluded.