Oil Demand and Electric Cars – 12/7/16

“The oil demand growth is not coming from cars, it’s from trucks, aviation and the petrochemical industry and we don’t have major alternatives to oil products there,” IEA Executive Director, Fatih Birol, said at the Energy for Tomorrow conference. “I don’t buy the argument that electric cars alone will cause a peak in oil demand at least in short and medium term.”

The EIA reports that of the total U.S. petroleum product consumption in 2015, 47% was motor gasoline (includes ethanol), 20% was distillate fuel (heating oil and diesel fuel), and 8% was jet fuel so Birol’s view may be reasonable. Still, Birol’s statement brings up the question how long exactly is the short/medium-term when many oil companies are already preparing to focus on petrochemicals and natural gas as demand for oil from the transportation sector begins to decline.

Bloomberg New Energy Finance estimates that plug-in cars will displace 13 million b/d of oil a day globally by 2040 — compared to current U.S. consumption of 19.4 million b/d — which is not small by any means, and the IEA chief’s comments contrast with recent pessimistic forecasts for the oil industry.

For example, Fitch Ratings reported reported Oct. 18 that battery technologies used by electric cars could trigger a “death spiral” investments linked to fossil fuels. Royal Dutch Shell Plc, the world’s second-biggest energy company by market value, said on a conference call on Tuesday that oil demand could peak in as little as five years as renewable energy and disruptive technologies gain traction.

The strong statements come primarily based on the downward trend in battery costs for electric cars and residential energy storage, which have plummeted since 2010 and are expected to continue falling.

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That large a decline makes electric cars competitive with conventional vehicles in a way they never have been before. Since the cost of the battery makes up a large portion of the electric car’s overall cost further cost reductions would bring electric car prices below even the new Tesla Model 3’s $35,000. If you include subsidies such as the $7500 federal tax credit for new electric cars and various state level incentives, then the number of electric cars could follow the exponential growth pattern indicated on the BNEF graph below

Should Congress lower efficiency standards or take away electric car subsidies, it will make gasoline cars a bit more competitive for a while, but it will also make them more costly to drive over the life of the vehicle. At worst, harmful U.S. policies would slow U.S. adoption, which was only about 25% of total expected adoption anyway, so shrink the blue bars of the graph based on how much of a slowdown you expect.

So electric cars will definitely have an impact on oil demand, but what about the other areas Birol mentioned?

Semi-trucks obviously have different requirements than cars; they need to travel much further in a day for one. Part of what holds back electric cars is concern about travel range and the time it takes to charge the battery. For cargo trucks — semi-trucks that criss-cross the country at the fastest pace they can manage — having to stop to recharge for any longer than the total time it takes to sleep and fill gas tanks would be a deal breaker. Tesla, a company largely unique in its dedication to all electric vehicles, is only offering a semi-truck model that uses natural gas to extend its driving range. Still, that natural gas range extension poses its own threat to oil demand… if using natural gas becomes more cost-effective.

A similar problem shows up for aviation. Though a plane running on batteries and solar power can travel the world, it still does so much more slowly and with many more stops than conventional aircraft.

Its wishful thinking to believe oil demand increasing solely on petrochemicals could make up for a significant loss of the around 75% of crude oil used to make fuel for transportation; however, so long the road blocks for making electric trucks and planes are in the way that may not be a problem for oil demand for at least a few decades.

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