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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

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.

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5 Comments

Not maybe due to cost?
 

So have you ever heard of peak Oil?
 

EROEI?
ie what is the ERORI for you biofuel plant?

Biofuels are ok if you are looking just for an alternative to diesel or petrol. Once it is produced on land that otherwise is used for food production you are already on the wrong track.
If you are looking at reducing supposed GHG emissions there is plenty of evidence that all in all you are no better off and quite likely worse off then conventional fuels. That is a numbers issue and as we all know numbers can be explained in soo many ways.
 
Steven
Peak Oil, give us all a break will you. That term is soo ancient and for the time being soo unfounded. Not to say that in 60 or so years it may actually be relevant but right now let's get on with things that matter.
 
 
Diesel versus fuel for the light vehicle fleet.
We went through the exercise several times over the last few years but when all things are considered the costs are roughly the same. I think that too many people are of the mistaken belief that they save money with diesel but forget about the other charges they will face. You need to do a lot of travelling to make it worth while if you believe that you save money. At less then 30K per annum you might as well stay with petrol.
 
Tesla may have something but please add at least 4 hours to your trip to Wellington from Auckland or vice versa, that is just for charging at the half way point, if you can find a proper charging station that is, otherwise you may have to stay the night (or weekend) somewhere. And for NZ with a relatively large hydro based electricity system it can help with GHG emissions but if what is used is coal produced the GHG saving is marginal, if any, however it only costs $40 in electricity to go that distance. $70 odd on diesel plus user charges but then you don't have to shell out 120K for the car. Not to mention of course the possible extra night somewhere along the way.

Hydro looks good on paper for GHG reduction but you have to have a whole valley system that you're willing to sacrifice.  Once the low hanging fruit of the best valleys are used then the returns and benefits dry up (I kill me) rather quickly.   Like most alternatives, reduction of wastage and using the best yielding spots then variety of supply works best for environment.

 That includes not using fuel oils for space heating, or almost no coal, gas for very few process and hardly any cooking.  Solar for most domestic hot water, PV for lighting and a few tasks.  El-musk batteries for load spreading.

 Then we can look at what works best for commuters, long haul, travellers, sports.
Many commuters don't drive more than 200km in a day (remember you don't spend electricity idling).  Yet electricity for long haul is foolish, whereas biofuels and diesils make good sense for long haul and work vans/buses.

Leave the coals and gas for the industries that need it for more than just burning it up.

For the petroleum/diesil by products, we can look to places that really don't have viable alternatives to fossil fuels, airline and ferry fuels.

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