In an environment of heightened international oil price volatility driven by rapidly changing supply and demand, Z Energy CEO Mike Bennetts provides a domestic perspective on road transport fuel demand

By Mike Bennetts*

Today’s society often works on the presumption that we are always going to need 'more'.

More GDP growth, more housing, more roads, more fuel.

However, that’s unlikely to be the case with the latter.

As the expanding middle class in countries such as China contribute to a global growth in demand for transport fuel, developed nations such as New Zealand are more likely to see demand plateau over the next ten years. 

In fact, demand for petrol, as well as diesel sold to retail customers (note the distinction) has been declining for a while now.

Since a peak in 2007, there’s been a gradual but steady decline in retail fuel consumption nationally by roughly seven per cent.

The decline is due to a combination of flattening light vehicle kilometres travelled (VKT) per person and improving light vehicle fleet efficiency.

Energy efficiency, often touted as “the fifth fuel”, is unlocking more and more value from every litre of fuel. A range of internal combustion engine technologies are increasing the fuel efficiency of the New Zealand vehicle fleet, and new, light vehicles running on petrol have been becoming, on average, two per cent more efficient every year. With diesel it’s about a one per cent gain on efficiency every year.

This would mean that the light vehicle fleet in New Zealand in 2024 is likely to be about 28 per cent more fuel efficient than it was in 2005.

Consumer buying behaviours are also changing, particularly with the growth of technology that helps people stay connected without having to hop into a car.

For example, there is a correlation we’re now starting to see between broadband connections and discretionary travel. If you think about the rise of online shopping (up 12 per cent in December 2014 compared to December 2013[1]), technology-enabled remote working,  and the prevalence of social media, free video calling and real time photo and video sharing technologies, this reduction in technology-driven discretionary travel begins to make sense.

This falling demand for petrol however, is offset by growth in diesel demand. While some of this demand is driven (excuse the pun) by more diesel vehicles entering the light vehicle fleet, the real increase in demand is seen, and in our view will continue to be seen, in the commercial market.

Diesel volumes are closely tied to GDP growth, and is often used as an indicator of the health of the economy. There was a far more noticeable dip in diesel demand in New Zealand during the global economic downturn of 2008/2009 than there was with petrol. Our view that demand for diesel will continue to grow in New Zealand is based on its historical correlation to GDP as well as an increased economic reliance on the freight of primary produce versus manufactured, value-added goods. The latter could see diesel growth outperforming GDP growth because of the lower GDP value gained from every litre of diesel. However, just like the petrol light vehicle fleet, improvements in heavy vehicle fleet efficiency is an offsetting factor as to the extent of diesel demand growth. 

These are long term trends I am talking about. In the short term, fuel demand will still peak and trough like it always has, and always will. Seasonal demand, oil price and economic activity are all factors that will influence how much transport fuel people use. However, our expectation is that we will not see an overall material increase in the demand for road transport fuels.

One thing we will be seeing an increase of is the diversification of the road transport energy mix, though this will be more marked over the next 20 years than the next 10. I should point out that as a transport fuel reseller, at Z we’re agnostic about the type of fuel we sell, and our stand on sustainability means we welcome, and are happy to lead the charge on alternatives.

But the reason I say that change is going to take time is because New Zealand has a tendency to keep its vehicles on the road for longer, and almost half of the light vehicles coming on the road each year are used imports, primarily from Japan. According to the Ministry of Transport, the average age of the New Zealand light vehicle fleet in 2013 was around 14 years, with 40 per cent over 15 years old. To put this into context, for much of Europe and Japan, the average age of light vehicle retirement is around 11 years – in New Zealand it’s around 19 years.[2]

So fossil fuels will still be dominant, but alternative transport energy options, particularly the use of biofuels and electric vehicles, will make up more of the road transport fleet.

Electric and plugin hybrid vehicle registrations are still minimal but they are growing. The environmental benefits are particularly attractive for New Zealand given around 70 per cent of electricity generation is from renewable sources.

In 2010 there were nine registrations of electric vehicles in New Zealand. By the last quarter of 2014, there were 72 electric vehicle registrations as well as 168 plug-in hybrids out of a vehicle fleet of around three million. The upfront cost and range capability remains a barrier to widespread use at this time, but we anticipate seeing a small, albeit significant increase as technological advancements help bring the cost down over the next ten years and range increases - recent reports suggest Tesla Motor’s outlook is for $100/kWh within 10 years.

Currently New Zealand lags behind the rest of the world in the use of biofuels in transport. The use of biofuels can be controversial, however if sustainably produced without competing with food production, it has tangible greenhouse gas benefits of fossil fuels.

We have inside knowledge that the use of biofuels in New Zealand is about to increase dramatically by at least 20 million litres by next year. We’re fairly certain about this because we’re the ones building a biodiesel plant!

That said, even if we scale the plant up quickly, we will still only be able to produce 40 million litres per annum from available local feedstock. This is still only about one per cent of the amount of diesel consumed in New Zealand last year.

No doubt there will be more pronounced diversification of the transport energy mix looking out to 2035.

However over the next 10 years, our prediction is that petrol and diesel will still be far and away the dominant land transport fuel of choice with biofuels and elective vehicles gaining ground, but we are unlikely to see an increase in overall demand for ground transport fuels.

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Mike Bennets is the chief executive of Z Energy.