By Robert Auers
Mark Twain is often famously (mis)quoted as having said, “The reports of my death are greatly exaggerated” after hearing of his own obituary being printed in a major American Newspaper in 1897. Twain, meanwhile, was alive and well in London and went on to live another 13 years after this incident. He was, however, much less prolific as a writer in his old age, with his best-known work written after this date being, The Mysterious Stranger, which was published posthumously in 1916.
We mention this anecdote because the Internal Combustion Engine (ICE) seems to be in a similar position today. On Saturday, August 12 The Economist published an article titled, “The Death of the Internal Combustion Engine” and its same sentiment is echoed in numerous articles published by other high-quality news sources across the globe. At TM&C, however, we believe the ICE still has more than a few good years left.
“There are lies, damned lies, and statistics.”
First, let’s look at some statistics. While growth rates of plug-in electric vehicle (PEV – including plug-in hybrids) sales look astounding (averaging 55.4% annually) over the last four years, absolute PEV sales are still very low – only about 0.8% of all new cars sold globally in 2016 were PEVs. Furthermore, the 2016 growth rate of 41.9% YoY, while still impressive, is the lowest annual growth rate in PEV sales since at least 2012, when total EV sale numbers were still negligible. Additionally, PEVs continue to make up less the 0.2% of the global vehicle fleet. Despite this, most major organizations are forecasting EVs to make up more than 10% of the global vehicle fleet by sometime between 2030 and 2040, and for new EV sales to pass those of traditional vehicles during some point in the same time period. Given the current average lifespan of most vehicles on the road and these sales estimates, one would expect EVs to constitute the majority of cars on the road by 2050. Moreover, one could expect ICEs to be virtually extinct from the passenger car fleet sometime between 2060 and 2070, if these forecasts play out. The chart below shows global EV sales through 2016.
So, what’s causing these impressive growth rates in EV sales? Are EVs truly on the verge of becoming economic for the masses?
While there’s no doubt EV prices have dropped significantly over the past several years, there’s still more to the story than technological advancement alone. The impressive growth numbers to date are largely driven by government subsidies and razor-thin, and sometimes negative, margins for manufacturers. For Example, In Denmark, which began phasing out EV subsides in Q1 2016, PEV sales fell nearly 60% between 2015 and 2016, while EV sales for Europe (as a whole) increased 7% over the same time period. As the subsidy phase-out extends into the current year, these sales trends appear to be continuing as well, with EV sales dropping another 60% YoY in Q1 2017 in Denmark, while sales in the EU increased by 30%. Furthermore, while many countries have been able to fund EV sales growth thus far with various subsidies, it’s clear that these policies will not be sustainable in the long run.
Moreover, It’s been suggested that GM is losing somewhere between $8,000 and $10,000 per for every Chevy Bolt EV sold. While these numbers are only speculation, they still leave us questioning the economics behind EVs. Likewise, Tesla, whose reported gross margins have hovered near 23%, has struggled to produce real earnings or free cash flow. In fact, negative free cash flow of over $3.1 billion over the trailing 12 months has been the worst for the company since its founding. While we understand that the company is still scaling its business and has large capital spending obligations due to the upcoming model 3 launch, these numbers are enough to leave skeptics questioning the viability of the business.
“Few things are harder to put up with than the annoyance of a good example.”
Meanwhile, the ICE continues to make progress, despite its old age. Mazda’s most recent breakthrough, its so-called Skyactive-X engine, has the potential to improve the fuel economy of gasoline powered cars by as much as 30%. The engine will basically use compression and heat – instead of spark plugs – to ignite the fuel (much like a typical diesel engine) during normal operation. It will, however, still have spark plugs, which will primarily be used only until the engine heats up to near its normal operating temperature.
But this isn’t the only new technology to improve fuel economy. Just last year, Nissan announced that it had successfully produced a variable compression engine that can improve mileage during normal driving. The engine’s compression ratio can vary from 8:1 to 14:1. It uses the lower compression ratio for performance – to prevent knocking – and the higher compression ratio for fuel efficiency. This engine is scheduled to make its commercial debut in some of the 2018 Infiniti models.
Additionally, research continues to be done on new ICE technologies. Achates Power in San Diego is currently working on an opposed piston engine, which they believe could improve fuel efficiency by as much as 50% relative to today’s gasoline engines and 30% relative to today’s diesel engines. In this type of engine, the cylinder has a piston on both ends, eliminating the need for a cylinder head. Achates believes that they can produce an operable truck with their opposed piston design by sometime next year and nine different auto makers have signed on as development partners. The technology is expected to first be available in light trucks, but to eventually make its way into smaller passenger vehicles as well. The tables below illustrate how. If successfully implemented as planned, this engine could affect the fuel costs for some cars in different countries. In Italy and Germany, the Chevy Bolt is compared to a Renault Clio Diesel and in the U.S.; the Bolt is compared to the Honda Fit. Range and Mileage estimates are based on the applicable EU or U.S. EPA estimates for these cars. The fuel economy estimates for the vehicles using ICEs are then increased to reflect their hypothetical performance assuming their engines are converted to an opposed piston design.
In Germany, where electricity is very expensive, the costs are actually reversed in this scenario, and the fuel cost for EVs becomes higher than that for a similar ICE-powered vehicle. In Italy, the two are neck and neck and in the U.S. the EV fuel costs are still lower by about 30%. Still, assuming the prices given in the table and that the vehicles are each driven 12,000 miles/year, annual fuel savings would only amount to ~$150 for the Bolt in this hypothetical scenario in the U.S. Furthermore, environmental factors, such as ambient temperature and driving style, can significantly improve the performance of ICEs relative to EVs. For example, AAA has shown a decrease in the ambient temperature from 75° F to 20° F can reduce EV range by nearly 60%. Likewise, maximum efficiency for most ICE-powered cars is achieved at a speed of roughly 55 mph, while the maximum efficiency for an EV is typically achieved between 20-25 mph. Therefore, while ICE-powered vehicles are typically able to achieve much better fuel economy on the highway than in the city; the same is not necessarily true for EVs. In fact, if you drive a Tesla Model S 100D at a constant 25 MPH in 80° F weather, with the windows up and the air conditioning off, you may be able to squeeze nearly 700 miles out of a single charge.
Of course higher oil prices could also alter this relationship, specifically in the U.S., where retail fuel prices are more closely related to wholesale prices due to lower fuel taxes. Still, it does not appear that oil prices will rise to near pre-crash levels anytime in the near future. TM&C provides proprietary comprehensive pricing forecasts for crude oil and petroleum products in the semiannual Crude and Refined Products Outlook; however, the WTI futures curve as of market close 8/18/17 is displayed below and clearly illustrates that the market continues to expect a lower for longer period in crude oil prices.
In short, while electric cars are likely the vehicles of the future; at TM&C, we believe the ICE will continue to dominate the transportation sector in the years to come. As a result, demand for petroleum-based transportation fuels will continue to rise as economic progress is made across the developing world and more new cars enter the global vehicle fleet. Furthermore, these gains will more than offset declines from increasing efficiencies, stagnation in vehicle miles traveled, and EV adoption in the developed world.
TM&C constantly monitors changes and projected changes in petroleum supply and demand across the globe. Our projections take into account changing rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (which was released last week) and our various other studies. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting us, visiting our website at turnermason.com or calling Shanda Thomas at 214-754-0898.