An Energized Forecast

 | Dec 12, 2011 | 5:01 PM EST
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Recently, Exxon Mobil (XOM) released its forecast through 2040, and the company's insights and conclusions about transportation fuels are a bit surprising.

The report shows a robust and growing worldwide economy for at least the next 30 years. Analysts see a dip in European economic activity in 2014, which will be corrected by 2015. So, it appears that the world will see decades of growing demand for energy, but, expect big changes in how consumers will use energy.

Worldwide consumers, including U.S. consumers, will become increasingly frugal with their use of energy. According to ExxonMobil's report, one of the most profound shifts in energy usage will come from the transportation sector: "The proliferation of hybrid and other advanced vehicles -- along with improvements to conventional-vehicle efficiency -- will result in flattening demand for personal transportation, even as the number of personal vehicles in the world doubles. In contrast, demand for fuel for commercial transportation -- trucks, airplanes, trains and ships -- will continue to rise sharply."

ExxonMobil expects no shift toward natural gas as a transportation fuel. Natural gas vehicles (NGVs) will be deployed, but in ExxonMobil's view, they will not become the dominant solution for personal transportation. NGV's are expected to account for less than 1% of all light duty vehicles.

The report also shows that hybrid vehicles will move from the margins to the mainstream. By 2040, the number of personal vehicles in the world will nearly double to 1.6 billion vehicles. The vast majority of this growth will come from emerging nations, where prosperity is expected to continue growing and vehicle ownership levels are currently low.

By 2040, ExxonMobil expects that hybrids and other advanced vehicles will account for nearly 50% of all light-duty vehicles on the road, compared to only about 1% today. The majority will be hybrids, which will use mainly gasoline plus a small amount of battery power. Hybrids are expected to make up more than 40% of the global fleet by 2040.

On a global basis, ExxonMobil expects to see growth in plug-in hybrids and electric vehicles, along with compressed natural gas (CNG) and liquefied petroleum gas powered vehicles. However, these natural gas vehicles will account for only about 5% of the global fleet in 2040, since their growth will be limited by cost and functionality considerations.

The forecast for hybrid vehicle seems inconsistent with other views. T. Boone Pickens and companies, such as Clean Energy Fuels (CLNE) and Westport Innovations (WPRT), believe that natural gas vehicles are cost effective when all costs, including indirect costs, are considered. These indirect costs include protecting the international transport of crude oil and protecting related shipping lanes.

ExxonMobil's opinion that hybrids will win in the light-duty sector and diesel will win in the heavy-duty sector is based on sound reasoning. The company believes that of all advanced-vehicle technologies, consumers will conclude that hybrids offer the best value for light-duty transportation. By 2030, ExxonMobil expects hybrid vehicles to cost about $1,500 more than similar-sized conventional vehicles, whereas CNG vehicles will be $4,000 more and electric vehicles will be $12,000 more.

It appears that electric vehicles are economically inefficient, and consumers cannot recover their higher purchase costs within five years unless real gasoline prices exceeded $10 a gallon. With gas prices hovering around $4 a gallon, it would take more than 15 years to recover additional costs.

Similar arguments influence the heavy-duty sector. Commercial transportation will see its demand for fuel increase by 70%. Most of this demand will come from more diesel fuel with less from gasoline. Insignificant amounts will come from natural gas and electricity.

If investors accept ExxonMobil's analysis and their assumption that the real cost of gasoline will remain below $10 a gallon for the next decade, they might want to avoid investments in electric or mostly electric vehicles offered by Nissan Motors, Mitsubishi Motors and General Motors (GM)They also might want to dial back their expectations for NGVs.

One of the most interesting forecasts offered by ExxonMobil is the company's estimate for worldwide fuel consumption for personal transportation and light-duty vehicles. Despite an exploding inventory, by 2015 the number of barrels consumed on a daily basis is expected to decline each year. That suggests pollution from these same sources will also decline. That is the gift of energy efficiency.

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