Electric Cars: Impact – 2/17/17

Improved battery technology is about to bring electric vehicles (EVs) to the masses faster and with a greater impact than almost anyone expected.

The proportion of EVs out of all cars on the world’s roads is still well below 1% with most forecasts estimating an increase in that number to around 4% by 2025. Now those estimates are looking quaint as car makers announce huge expansions in their EV production. Banks Morgan Stanley and Exane BNP Paribas now predict numbers closer to 7% and 11% of vehicles by 2025, respectively.

Ford has promised 13 new electrified cars in the next five years. Volkswagen, 30 new battery-powered models by 2025, also saying that EVs will account for as much as 25% of its sales.

The falling cost of batteries will make the cost of owning and running an EV the same as that of a conventional car by the early 2020s, even without subsidies. Vehicles once bought only for the sake of the environment will become the cheaper option as well.

Better, cheaper batteries should also conquer “range anxiety” as pure EVs go from driving 100 miles on a single charge to more than 200. If battery technology continues to improve at the current rate, the price of a car with a range of 300 miles could hit $30,000 by the early 2020s, according to Exane BNP Paribas. In addition, better, more numerous charging points will also mean recharging in minutes, not hours, and alleviate fears of being stranded. In the U.S., the number of points grew over 25% to about 40,000 last year.

But EVs are not yet a profitable business for carmakers precisely because of their batteries. Each sale of Chevrolet’s Bolt will reportedly set GM back $9,000 and even Renault-Nissan, the biggest EV manufacturer, continues to lose money on its electric models. Research and development, as well as restructuring are also extremely expensive processes that could force many manufacturers to take multiple years of losses as they make the switch.

EVs may eventually make more money than internal combustion cars as battery costs fall further and their simpler design lets companies cut labor costs, but the only thing more costly than the initial transition would be missing it altogether.

If the effect of EVs on car makers will be large, their effect on oil companies will be absolutely massive.

About 2 million barrels a day of oil demand could be displaced by EVs by 2025, equivalent to the mismatch of supply and demand that triggered a 50% drop in the price of oil over the past three years, according to research published by Imperial College London and the Carbon Tracker Initiative. A similar 10% loss of market share caused the collapse of the U.S. coal mining industry, the report said, illustrated below in a graph from Bloomberg.com.

BP says EVs could erase as much as 5 million barrels a day of global oil demand in the next 20 years, while analysts at Wood Mackenzie estimate the loss of as much as 10% of global demand over the same period. Royal Dutch Shell Plc CFO Simon Henry recently said that oil demand could peak in as little as five years.

The cost of EVs is already falling faster than previously forecast; they could reach parity with conventional internal combustion vehicles by 2020, eventually saturating the passenger vehicle market by 2050, according to the report. EVs may take 19% to 21% of the road transport market by 2035, according to the researchers, or three times BP’s projection of 6% market share in 2035. By 2050, EVs would comprise 69% of the road-transport market, with conventional oil-powered cars accounting for about 13%.

Considering that almost three-fourths of all oil consumed in the U.S. is used for transportation, the loss of oil-demand from cars would have a devastating impact on unprepared companies in the oil industry.

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