Tesla, BMW, Toyota, Nissan; anywhere we look on the street, hybrid and electric cars seem to be appearing more and more, aimed at varied demographics, with increased media focus around customer incentives to move to electric. While for the consumer, they target hearts with a zero-carbon footprint message, and purse strings with city driving exemptions, the following questions arise: What happens to the oil industry? What impact does increasing the number of electric cars, an essential utility of our everyday life, have?
The first thing to clarify is that the increasing number of electric cars is not as extreme as we might think. In a speech made by Shell in 2016, only 0.13% of global passenger vehicles are electric. There’s no doubt that electric cars are an important and growing part of the transport mix. The IEA (International Energy Agency) expects the number of electric cars on the roads to exceed 150 million in 2040. But given the scale of the system, even with massive growth in electric cars, we believe the majority of vehicles will continue to be powered by internal combustion engines over the next couple of decades.
There has been a drop in the sales growth over the last few years. In 2015, it decreased to -5.2%. 2016 tried to make up for it with an increase to 36% but 2017 saw another decrease in sales growth (26%). Perhaps looking at oil prices during this period gives us a reason for the drop in EV sales with prices significantly dropping in 2015 and staying low until 2017.
Surveys also underline that fuel efficiency is not amongst the top five important factors for a car purchase anymore. Despite the Paris Climate Summit, in which the focus was on a new global climate agreement to reduce global greenhouse gas emission, attended by the former US President Barack Obama and other world leaders, and all the warnings regarding a global warming crisis and reducing our carbon footprint, it seems environmental concerns only go so far when it comes to buying a car. At the end of the summit in 2015, 196 countries signed an agreement to reduce greenhouse gases.
“We consistently find that the top two factors, regardless of segment, whether you’re looking at a small car or a huge luxury SUV or a pickup truck, are reliability and safety,” Akshay Anand, commercial insights manager for Kelley Blue Book, “fuel efficiency for a lot of people isn’t a top-five important thing anymore.”
However, all this does not mean there is no future for Hybrid & Electric vehicles. Plans by UK and France to phase out petrol and diesel cars over the next two decades have added to policy momentum behind EVs. Volvo announced that all new models would be electric or hybrid from 2019. Tesla, meanwhile, has stepped up its efforts to break into the mass market with the launch last month of its much-hyped Model 3, billed as the company’s first affordable EV.
So how does this correlate to the oil & gas industry?
While it is obvious that oil prices are currently low, this is not an unusual fluctuation over the last few decades. These low prices are a result of new refineries and wells being opened up across the middle east, and new deals being agreed. Oil is still a readily available resource, and with the well-established processes, the prices for production and therefore consumer costs will remain lower than electric for a number of years.
Oil and gas are also still vitally used in the production of the electric vehicles themselves and in the production of electricity to charge them in a large number of cases.
Speaking at the Oil & Money Energy Conference in London, Fatih Birol, Executive Director of the International Energy Agency said “the uptake of electric vehicles would not cause a sudden shock because less than 10 per cent of growth in oil demand comes from cars. Last year was a record for electric cars with 500,000 sold, however when you put that in context, it is less than one car out of every 100 sold. Even if you assumed that, as of tomorrow, every second car sold was electric, global oil demand would still increase.
Despite potential decline in oil demand from cars, it is likely to be offset by a growth in aviation and heavy freight transportation, both of which are harder to switch to alternative fuels.
Oil required for transportation will continue to grow. Of a 42 US gallon barrel of crude, 86% is utilised for transportation fuel (20 gallons of gasoline, 12 gallons of diesel and 4 gallons of jet fuel).
Large oil companies still aren’t burying their heads in the sand however. Shell and Total have been looking to diversify their energy assets through hydrogen as a transport fuel. In January, both companies joined a global hydrogen council that included Toyota, Liquide, and Linde. The companies will be investing about $10.7 billion in hydrogen products over the next five years.
Not taking into consideration all the hypothetical scenarios, the fact remains that the automobile industry is only responsible for 10% of the oil industry’s growth. Oil is still in high demand, with high transportation growth and large numbers of resources still available, keeping prices down for the consumer. With the big companies aware of this, and the need to invest in alternative future energy, they seem more than ready to adapt to the changing environment and are unlikely to see massive profit decline, despite lower oil prices and higher expense in production of new technologies.
But if we are looking long term, it seems in order for both areas to survive and thrive. EV and the oil and gas industries must start collaborating and developing technologies together to achieve Government and Global carbon footprint targets.