The global peak in oil consumption may already be past us, according to a new report from Carbon Tracker — and the rapid transition to low-carbon transport in China and India is the reason why. 

The report released Friday underscores the role that transportation in emerging economies will play in future oil demand and how quickly falling battery costs and increasingly aggressive decarbonization policies are accelerating the shift from fossil-fueled to electric vehicles. 

Data from the International Energy Agency (IEA) shows that 80 percent of the projected growth in demand for oil from now to 2030 is from transport in emerging economies. China and India are responsible for half of that projected growth.

But the IEA's current forecasts haven't yet accounted for the dramatic policy shifts coming from Beijing. In September, China's President Xi Jinping told the U.N. General Assembly that the country was aiming to hit peak carbon in 2030 and become carbon neutral by 2060. The details will be laid out in the country's 14th five-year plan.

Kingsmill Bond, lead author of the Carbon Tracker report, told GTM that the shift implied in China's announcement adds important new data to future oil demand projections. 

“We've demonstrated that the key driver of expected oil demand growth in the next decade (if you take the business-as-usual step scenario) is...emerging market transportation,” he said. But if future transport electrifies, "it basically means that the demand [from transport] is essentially flat, and that...removes almost all of the demand growth for oil."

"It's a really significant issue,” he added. While aviation and shipping also account for a portion of future oil growth, 92 percent of transportation in emerging economies is road transport.

How likely is China’s electrification?

China is the world’s biggest oil importer, buying 70 percent of the oil it uses from overseas. That makes slashing its oil use not only a sound decarbonization strategy but also a way to boost its energy security and global diplomatic posture.

“Energy security is firmly on Beijing’s radar amid rising tensions with the West,” Hugo Brennan, principal Asia analyst at Verisk Maplecroft, told GTM in an email.

“China is the world’s largest importer of crude oil, and Beijing is acutely aware that this represents a strategic vulnerability. Beijing is keen to reduce its heavy dependence on foreign oil, particularly seaborne supply from politically unstable regions that must transit strategic chokepoints,” he added.

EV adoption rates around the world suggest China is far from a laggard. (Credit: Carbon Tracker)

Bond points to the fact that electrification is well underway in China, with 60 percent of two-wheelers and 60 percent of buses electrified. The country’s Ministry of Industry and Information Technology said in October that to hit the 2060 goal, all car sales in China will need to be EV or hybrid by 2035.

Many oil majors are already preparing for this scenario by boosting their capabilities in EV infrastructure and hydrogen. Last week, Shell signed off on its first commercial hydrogen project in China. BP is the EV charging partner of DiDi, which is China’s equivalent of Uber. DiDi and BYD are building a new EV designed specifically for ride-sharing.

Electrification one wheel at a time

The situation in India is a little more complicated, Carbon Tracker's Bond noted. 

“It's very hard for the Indian government to mandate high sales of electric vehicles,” he said, given that that could mean “subsidizing electric vehicles for rich people in a very poor country. That's never going to work.”

What is playing out in India is the seemingly inevitable economics of falling battery costs. The cost of an electric-powered and a petrol-powered three-wheeled rickshaw are now equal, so the lower running costs of an e-rickshaw are winning out, he said. 

In 2018-2019, 3.38 million passenger cars were sold in India compared to 21.18 million two-wheelers, according to auto-industry figures. Bond expects that as battery prices continue to fall, two-wheel transport will follow rickshaws and become dominated by battery-powered drivetrains.

Ultimately, building out transportation infrastructure from a lower base provides emerging economies a chance to leapfrog to the low-carbon era.

“The average person in the United States uses 1.9 tons of oil a year for transportation. The average person in India uses 0.1 tons," he said. "So if you're the Indian government today, you've got to either build out a network of refineries and metro stations and pipelines or you've got to build out a grid network, one or the other." 

Given that one system offers energy independence and the many benefits of improved air quality and lower carbon, Bond is confident about which way things will go: “It's much more likely that you're going to build an electric-based transport system than an oil-based one because it's the future, basically.”