Are Electric Vehicles Really About To Plateau Oil Demand?

Market conjecture over the transition of human mobility to electric vehicles (EVs) resulting in a cooling of oil demand has been steadily gathering momentum in recent years. There are also those who are dismissive and plenty who are supportive of such an event occurring in little over a decade.

Recently, the International Energy Agency (IEA) joined the latter camp predicting that overall demand for energy is set to increase by 1% per every year until 2040, but that demand for crude oil will plateau in 2030, ten years earlier than it had predicted, due to a rise in the use of EVs.

The think-tank, which counts 30 major energy consuming nations among its members, opined in its World Energy Outlook 2019 that annual EV sales could rise under certain scenarios and policy conditions to reach 10 million by 2025 and more than 30 million in 2040, from the 2018 sales level of 2.1 million.

That would imply an EV global stock on the road totaling above 330 million by 2040, up from a current stock of just over 5 million, displacing around 4 million barrels per day (bpd) of oil consumption.

The 2018 EV sales figure in itself represented an over 60% uptick on numbers recorded in 2017, according to McKinsey, and 2019 could yet see more than doubling of the past year’s volume.

Dr Fatih Birol, Executive Director of IEA, did attach a caveat that key factors seen putting electric mobility in the fast lane are: “subsidies, at least in the near term, increasingly strict fuel economy targets, restrictions or penalties on the sale or use of conventional cars or their circulation.”

Whichever data gatherer you rely on, China leads the way. At 1.1 million EVs, or 51% of global unit sales in 2018, the country’s market is now about three times the size of the European and U.S. markets each, according to EV-volumes.com. While the U.S. market almost doubled to 360,000 units helped in no small part by Tesla’s 140,000 Model 3s sold in 2018, Europe continues to see mixed results.

EV sales on the continent account for less than 2% of market share in large markets like France, Germany and the U.K., but smaller markets like Norway (40% market share), Iceland (17%) and Sweden (7%) continue to display sterling results supported by subsidies.

Tightening CO2-emission regulations will also most likely lead to “significantly larger market shares” for EVs across Europe through 2020–21 and beyond, according to McKinsey and the IEA.

In terms of original equipment manufacturer (OEMs), Tesla is now the world’s largest EV producer, followed by two Chinese automakers, BYD and BAIC Motor, and over 100 EV models from a plethora of global manufacturers are on the horizon in the next 12 to 18 months, including several being launched by luxury carmakers such as Toyota’s Lexus, Porsche, BMW and Jaguar Land Rover.

At the recently concluded Abu Dhabi International Petroleum Exhibition And Conference (ADIPEC) 2019, the evolving landscape and challenges of OEMs were hot topics in the wake of the IEA’s demand projections.

Peter Terwiesch, President of Industrial Automation at ABB, told Forbes the entire automotive value chain is undergoing profound changes as OEMs follow different sourcing strategies across e-power-train components, and incumbents and new suppliers rethink things.

“The future of transportation in general, not just light vehicles, is changing. We see an increasing degree of the electrification of the drive train – not just EVs, but bikes and even marine vessels. ABB has partaken in several projects, where we have delivered completely electrical solutions to replace mobile units that were previously operating on hydrocarbon fuels.

“However, when we look at longer distances there will be a coexistence of different kinds of fuels to make the march to a low-carbon environment affordable, sustainable and safe. There is not one size fits all solution, and oil is not dead, but the future of EVs appears bright.”

Terwiesch also flagged falling battery costs, currently down to less than $100 per kilowatt-hour (kWh) in many cases from ~$650/kWh five years ago, and a reduction in charging times. For instance, ABB is currently marketing DC charging stations that have brought the charge for a car of 200 km range down to 8 minutes.

“That’s a compelling preposition, and we are increasingly seeing standardization in this space because customers are looking to charge at multiple charging points. They are also looking to get the inconvenience of conflicting standards out of their life as they move to electric mobility.”

Such a shift has led some to opine that year-on-year oil demand growth of over 1 million bpd every year would soon become a thing of the past, as crude consumption gets geared more and more towards petrochemicals and aviation, and less towards mobility solutions.

Even OPEC forecasts, generally deemed to be on the optimistic side, see demand growth slowing from a level of 1.4 million bpd in 2018 to around 0.5 million bpd towards the end of the next decade. In terms of headline growth, OPEC has lowered its projections for global oil demand to 104.8 million bpd by 2024, and to 110.6 million bpd by 2040.

But both naysayers and enthusiasts of EVs-curbing-crude-demand theories need to treat any projection with a degree of caution, according to Dr. Carole Nakhle, Founder and Chief Executive Officer of energy consultancy Crystol Energy.

“When we think of where oil demand is going in the future, we think of emerging Asia, not OECD demand where EVs are seemingly proliferating. Additionally, despite all the enthusiasm about EVs, I am really cautious because I don’t know whether there is an overestimation of the changes that EVs can bring about in the next 15 to 20 years versus demand for crude.”

There are severe problems with charging infrastructure and most positive soundbites on the subject appear to be coming from the West and not the East where bulk of car sales of any kind are. For example, the German government’s ambition of having 1 million EV charging points by 2030. The West is also where the most generous private EV vehicle ownership subsidies are, with the exception of China.

For example, in Norway there is no VAT on purchase of EVs, free parking and generally zero taxation even for premium electric cars. But every country is neither Norway nor has its level of affluence. A real test of EV adoption will come when China – the world’s biggest EV market – phases out all of its subsidies by 2020.

With the breakeven for EVs still a few years away, OEMs will inevitably feel operating pressure and not just in China. “Any way you look at it, you’ll need wealthy governments to get behind and encourage EV development. That’s perhaps easier to do within G7 or OECD economies but less so when we are taking about huge parts of emerging Africa, Asia and Latin America,” said Regina Mayor, Global Sector Head, Energy and Natural Resources at KPMG.

Another devil is the EV detail – on the face of it over 2.1 million units were moved in 2018 dominated by battery electric vehicles (BEVs). But plug-in hybrid electric vehicles (PHEVs) made for a substantial chunk of the numbers, according to McKinsey (see chart above).

The difference – a BEV has its driving range limited by the energy storage capacity of its battery, while a PHEV is equipped with a liquid fuel tank and an internal combustion engine, and therefore has virtually unlimited driving range.

Robust take-up for PHEVs means consumers’ “range anxieties” are not going away anytime soon even among the enthusiasts, Mayor added. “Stepping in to address these anxieties are integrated oil majors via their huge portfolios of fuel forecourts. This is a strong battle on who is going to own the hearts and minds of the future light and heavy vehicle fuels consumer.

“It could be petrol, diesel, electricity, hydrogen, CNG, LNG and oil majors still want to be the destination where people stop to top up and use retail space for 10 to 20 minutes on their road trip. They have the strategic real estate network to make that happen.”

Ultimately, it is also a bet that no single solution will transform global mobility in a setting where there are emerging markets with pockets of electricity outages. India is potentially among the biggest in that grouping with frequent loss of electricity in major centers on a daily basis. It is why the country’s nascent EV market remains largely dominated by mass- and low-cost-mobility segments, such as two- and three-wheelers with battery swaps part of the unit’s function, especially in the case of e-scooters.

Overall, emerging market power grid concerns, dilemmas of OEMs, potential loss of market subsidies and range anxieties could all be dismissed as growing pains of a an EV industry which has recorded commendable growth. Yet, pains they most certainly are.

Assuming the total EV fleet on global roads caps the 330 million mark by 2040; the figure would still be well shy of the 1 billion light units only mark crossed by internal combustion engine (ICE) vehicles back in 2010.

So, even if the most optimistic EV forecasts materialize, and a peaking of ICE sales is assumed from 2018 onward, a seismic demand shift would still be difficult if not impossible. Therefore, predicting EVs will directly plateau crude oil demand before wider market uncertainties, especially infrastructural ones, are settled appears rather premature.