Most experts agree that the future of oil is not bright at all.

Just before prices fell from their highs at over $110 per barrel in the middle of 2014, the common wisdom among the same experts was that prices were expected to stay high for a while.

But almost three years later, they are still in a relatively low range of the upper $40s to the lower $50s per barrel.

They may remain low for a considerable time as shale producers in the US have adjusted to this environment. Even though prices could rally in the short to medium term, in the long run (by that I mean as early as the late-2020s), oil will start losing its lustre.

This last age of oil will come as the transportation revolution displaces oil’s major role as a fuel for transportation, especially in motor vehicles.

An energy revolution is unfolding right in front of us. The International Energy Agency projects a large decline in the global use of coal and oil in energy as they are replaced by natural gas and renewables.

The cost of solar panels, batteries and wind production has fallen substantially since the mid-2000s. More important, renewables and electric vehicles are rapidly expanding, not only in the advanced countries but also in emerging ones.

For example, China was the world leader in installed solar power capacity and the largest market for EVs in 2015. Emerging economies are adapting fast to face the challenges of pollution and congestion.

The advent of EVs is a game-changer for the future of the oil market. As about one-half of the global oil market is road transportation (and about two-thirds in the US), the exclusive role of oil in fuelling transportation could vanish for good. In the aftermath, oil would become a widely available energy source competing with coal, natural gas, nuclear and renewables for electricity generation.

Many still argue that it will take a long time for EVs to displace motor vehicles. Bloomberg New Energy Finance projects about 25 per cent of cars would be EVs by 2040.

Opec increased its projection of the EV share globally from 6 to 22 per cent by 2040 in its 2016 World Oil Outlook. A report by Carbon Tracker and the Grantham Institute at Imperial College London forecasts that EVs would comprise more than half of the global stock of cars by 2040.

Given the recent acceleration in adoption and cost declines, EV adoption is likely to accelerate in the years ahead and EVs will dominate the car fleet by 2040.

Using a parallel of the horse displacement by cars over about 25 years in the US in the early 20th century, an IMF working paper “Riding the Energy Transition” shows that the share of EVs could reach 90 per cent by 2040 in this fast-adoption scenario.

This may seem far-fetched but many issues hindering adoption such as high cost, lack of infrastructure and the short range of the vehicles are rapidly improving.

The IEA and others project that the oil displacement in the advanced world will be more than compensated by the growing demand for oil in emerging markets.

Although this could be the case in the next 10 years, patterns of technology adoption suggest that emerging countries would follow suit quickly.

The rapid adoption of smartphones in the world displacing regular mobile phones despite much higher prices is a great example of what could happen.

Economic diversification is more important than ever in oil-exporting countries given it takes a long time to diversify an economy as I argued in my recent book Breaking the Oil Spell.

Motor vehicle displacement has promising implications for the fight against climate change.

Given that most oil is used for transportation, a fast displacement would support the climate change agreements and keep the global temperature from rising by more than 2 degrees Celsius.

This calls for strong government support for the adoption of EVs as well as renewables. It also calls for a strong international collaboration, especially between advanced and emerging economies in terms of technology transfers in green technologies.

Ours could be the last age of oil, but it could also be the beginning of a new age of sustainable and collaborative development around the world.

Source: ft.com