EVs are gaining traction, and although they still only make up a small fraction of the auto market, more and more analysts are starting to buy into the notion that EVs will quickly gain a foothold over the next decade or so, with massive ramifications for the oil market.
There has been a sea change of sorts in just the past year or two, with EVs going from a niche idea even in long-term forecasts, to one that many believe will increasingly take market share from the traditional internal combustion engine. There are many reasons for this – policy and market forces are reinforcing each other to bring the EV revolution closer and closer.
The falling cost of batteries have made EVs much more competitive, and EVs could become cheaper than gasoline or diesel-powered vehicles between 2025 and 2029, according to Bloomberg New Energy Finance (BNEF). BNEF predicts that EVs will capture than half of all new auto sales by 2040.
But government policies could accelerate this trend. The UK and France have announced a phase out of the internal combustion engine, banning their sales by 2040. China and India have also announced tentative steps in that direction, which, if finalized, would totally change the game.
And China could go a long way by itself in accelerating this transition. As the world’s largest auto market, China’s EV policy, which is still being formulated, could supercharge the race for EVs. The massive investments planned for EVs, combine with restrictions on dirtier forms of transportation, all done within a top-down economy, could spark rapid change. “They can order charging stations set up all over China, dictate driving and licence plate restrictions in major cities,” a western auto executive told the FT, drawing a clear contrast with what can be done in western economies.
China has several serious motivations to go big in EVs – it is the world’s largest oil importer, many Chinese cities suffer from horrific pollution, and the Chinese government also sees an opportunity in becoming a top EV manufacturer and exporter. To achieve this objective, China aims to be producing 7 million EVs per year by 2025, and will spend upwards of $60 billion on EV subsidies between 2015 and 2020, according to the FT. The potential phase out of gasoline and diesel vehicles in China will also dramatically alter the trajectory for EVs.
While the bans may seem far away, they send a signal to automakers that they need to prepare for a post-fossil fuel auto market. Already, a growing number of car manufacturers are announcing major changes in their fleets, and they will roll out a tidal wave of new EV models in the next five years.
It will only take a small change in oil demand to upend price forecasts. After all, prices crashed in 2014, falling from $100 per barrel down to $50 in less than a year. That occurred with a supply surplus of only around 2 to 3 million barrels per day (mb/d). In that context, the prediction from BNEF that EVs will erase 8 mb/d of oil demand by 2040 should send chills down the spines of oil executives. The exact point we reach peak oil demand is obviously very debatable, but in general, the mass adoption of EVs could permanently keep oil prices low, even under some relatively modest assumptions about the growth of the EV market.
Seeing the writing on the wall, some oil companies are not sitting idle. Royal Dutch Shell, one of the largest oil and gas companies in the world, just decided to purchase NewMotion, a Dutch provider of EV recharging stations. The acquisition of the largest EV recharging station owner in Europe is clearly a hedge against peak oil demand. Shell also said that it would install EV recharging equipment at tens of thousands of its retail gasoline stations. Reuters reports that BP has also been in talks with EV recharging providers about installing equipment at their retail refueling stations.
It is not a coincidence that Shell has some of the most aggressive forecasts regarding the pace of EV growth out of all the oil majors. Shell’s executives have predicted peak oil demand within a decade.
Chris Watling, CEO of Longview Economics, has arguably has the most aggressive forecast out there, predicting crude prices will collapse to $10 per barrel in the next six to eight years. He puts the Saudi Aramco IPO in that context, arguing that the Saudis are trying to monetize their assets before everything unravel. “Well I think they need to get it away quick before oil goes to $10 (per barrel),” he told CNBC in response to Saudi Arabia’s motivation to list a part of Aramco.
While few others see such dramatic upheaval, there is a growing consensus that the EV revolution is coming faster than many expected.