By Ryan Couture and John Auers
Two weeks ago (“Together in Electric Dreams” – Electric Vehicle Evolution or Revolution?), we began a discussion regarding the growth of electric vehicles (EVs) addressing both the history and recent developments as EVs attempt to get a foothold in the auto market. As mentioned in that piece, despite much hoopla and very high growth rates in recent years, EVs still remain a small part of both total car sales and total vehicles on the road. Certainly, governments around the world are trying to push EV’s as a key component of “decarbonization” in reaction to worries about climate change; however, while it has been proven that electric vehicles can be successfully produced and sold to select customers, many challenges to mass adoption remain. In this week’s blog, we will take a closer look at some of those challenges. We will also provide some guidance on how EV market penetration might progress as they move from dreams to reality.
When looked at on a growth rate basis, EV adoption has been rapid and many proponents have loudly proclaimed that a revolution is underway, moving the transportation market away from oil. As shown in Figure 1, global EV adoption rates have been north of 70% for the last several years, with the largest consumers of oil (US, Europe, Japan and China) leading the way, but growth rates tell only a part of the story, as the absolute level of EV’s in global vehicle fleets remains below 1%. What happens in the next several years will be key in determining whether the transition to electric vehicles continues apace, which would then really start to “eat into” oil demand, or slows down, with EV’s continuing to only “eat at the edges.”
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An important thing to note is that the adoption of EVs will likely be highly regional, with governmental regulations, consumer acceptance, demographics, regional oil prices and available infrastructure playing key roles in adoption. Obviously, electric cars are a more natural fit in urban environments, where the issues of limited range and the need for charging infrastructure can be easily overcome. As a result, we expect adoption to be the most rapid in the highly urbanized regions of Europe, Japan and China. Higher population densities, propensity toward smaller cars and higher fuel taxes in these countries all lend to higher adoption rates. In addition, the pollution problems plaguing many European and Chinese cities will put added pressure to reduce the number of internal combustion engines (especially diesel cars) on the streets.
When looking at U.S. adoption though, it is a slightly different story. While population densities along the Eastern seaboard and pockets along the West Coast are high, there are vast areas throughout the middle of the country where populations are much more spread out and “range anxiety” will significantly impact consumer acceptance. In addition, electric vehicles don’t do as well in cold climates. Lower temperatures impact battery performance and reduce range. Also, cold weather requires the use of battery power for heat, resulting in an even more limited range. Americans have had the luxury of relatively cheap energy for quite some time. This has helped breed our love affair with large trucks and SUVs, hardly the most “fuel efficient” vehicles on the road. With EVs, weight is the enemy, and the cost of enough batteries to give sufficient range to these large vehicles remains cost-prohibitive for a majority of consumers. While EV adoption in the U.S. will take place in the heavily populated pockets we just mentioned, there exist millions upon millions of people who will stick to regular gas-powered cars and trucks to get around for quite some time.
The large vehicle challenge doesn’t end there. There are millions of medium and heavy duty vehicles on the roads; everything from fire trucks and ambulances to garbage trucks and cement mixers use internal combustion engines (ICEs). For some of these vehicles, battery-only is a nonstarter. For others, it will require more vehicles to be purchased (as you can’t have your ambulance or fire truck run out of juice). With strapped budgets for most municipalities, it will take time before this is considered. While there has been some progress on “hybrid” natural gas/electric or hydrogen fuel cell/electric semi-trucks (Nikola, a startup manufacturer, announced a prototype demonstration in December) a pure electric is difficult due to the large amounts of energy needed to move an 80,000 pound truck hundreds of miles a day, and an efficient and fast way to recharge the batteries. After all, for truck drivers, time is money.
While in developed nations, the EV rollout will continue; in developing nations they face even more challenges. Much of Latin America is in recession, while much of Africa has been plagued by conflict. Both regions have widespread poverty, and the higher cost of EVs will hinder adoption. In addition, infrastructure is far less reliable than it is in developed nations. In areas where they lack 24/7 reliable electricity (or even running water), EV adoption is far off. These are areas where auto demand is growing the fastest and where petroleum demand will be growing.
As government subsidies disappear (many phase out once a certain number of vehicles has been produced), companies are being forced to pass the costs down to consumers, while bearing some themselves. With EVs, already more expensive than their ICE counterparts, this poses a challenge. Fiat Chrysler CEO Sergio Marchionne had publically said he hopes people do not buy the Fiat 500e, their electric car, as it cost the company $14,000 for every car sold. While this statement came out when the car first hit the market, the car still has a very limited sales area (currently only in California and Oregon) and starts at nearly $32,000, nearly double what the base model Fiat 500 costs. While some state incentives are available, the car carries a significant premium. Ford announced in early 2016 that they will expand their lineup of electric vehicles, including hybrids and limited plug-in electric vehicles by deploying such powertrains in their higher profit, higher volume trucks and SUVs, to help reduce costs by increasing volumes. This is intended to meet the government demands without competing directly with other manufacturers on lower cost, all electric options. Given the power demands of trucks and SUVs, it is expected a majority of these vehicles will be hybrid, and still have an ICE. The most high-profile, lower cost EV, Tesla Model 3 won’t be in production until mid-2017, and the earliest delivery dates are now well into 2018 for those who didn’t preorder.
The question is, how fast the electrification of transportation will displace petroleum demand, given that vehicle miles traveled (VMT) and global petroleum demand has steadily increased. Will EVs be able to overtake the petroleum demand growth rate? Recent analysis by Spencer Dale, chief economist at BP thinks otherwise. While BP thinks that electric vehicles will have a huge impact on air quality in concentrated areas, “It’s not a game changer over the next 20 years, even with aggressive electric vehicle penetration.” BP forecasts that 70 million may be on the road in two decades. The first million EVs were passed in late 2015, with the first half of 2016 showing 312,000 additional sales. Forecasts put the 2 million mark sometime in early to mid-2017. BP anticipates electric vehicles will have the biggest impact from 30-50 years in the future, although this could shift if social preferences favor their use. “Suppose people start buying EVs because of what it says about them, rather than economics. All the economic modeling we do may get thrown out the window,” Dale said.
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BP is not alone in this prediction. OPEC and ExxonMobil have also come out with a similar outlook on electric cars. OPEC estimates that by 2040, only 6% of the world’s cars will be operated by anything other than gasoline or diesel. ExxonMobil is a bit more optimistic, saying that 10% would be electric. From 2014-2040, ExxonMobil predicts a compound growth rate of 0.7% for oil demand. This amounts to 18 million BPD of additional demand, more than the entire U.S. demand today. While they account for major energy efficiency gains in their forecast (stating energy demand would double by 2040 without them) demand will be concentrated entirely in the developing world (with China plateauing by 2030). For many of the reasons discussed before, it is likely these areas may not see the same EV adoption rates as the developed areas.
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Another factor is the average lifetime of a vehicle. In the U.S., the average vehicle age has been increasing, with the latest estimate at 11.5 years. In the UK, this number is just under 10 years old. With sales of EVs a small portion of total vehicles (over 17 million per year in the U.S., and over 72 million per year globally), the lag between vehicle sales and significant demand impacts are protracted. If the average age and number of vehicles continues to increase (which is expected as more are sold in developing nations, and population continues to grow in many areas), it is possible that oil demand will plateau for quite some time before it begins to fall.
This all assumes there are no additional complications. Battery technology continues to push the bleeding edge, and with it can come catastrophe. While gasoline is volatile and can be dangerous during violent crashes, batteries have not proven themselves faultless. There have been fires in electric cars and most recently, a highly publicized recall of smartphones. Any storage medium for vast amounts of energy is hazardous, but the thought of “spontaneous” combustion of a battery inside an electric vehicle while sitting in the garage may be enough to sway people away. Public sentiment is fickle, and it takes only a few instances to have a significant impact (look at Samsung). Expect to see more stories as the number of vehicles increases and one or two high-profile “disasters” could slow growth.
Conclusion
While EV adoption percentages from a very low base have been significant, absolute numbers remain small. Projected growth varies significantly depending on a number of factors, including estimates of the absolute price of crude, battery technology development, charging infrastructure rollout, legislative action and social influences. The advent of novel energy storage technologies, both for electricity or liquid fuels (such as the recently discovered catalyst that can convert CO2 into ethanol), could ultimately have widespread impacts on the future of both EV and alternative fuel vehicles. Ultimately, only time will tell how fast adoption grows and when it begins to plateau.
We at TM&C remain confident that petroleum will continue to play the primary role in transportation fuel markets for years to come; however, we also believe that EV’s are a threat and potentially a serious one to petroleum demand growth. As such, we continually follow developments which will impact EV adoption. Our upcoming 2017 CRUDE AND REFINED PRODUCTS OUTLOOK, which will be issued in early 2017, will include significant analysis of the EV markets, including an updated forecast of adoption rates and the corresponding effects on petroleum demand. For more information on this or our other products or services we provide, please do not hesitate to send us an email or give us a call.