Change in the world of wheels is accelerating! Momentum is building and some days it’s hard to keep up. Every week, the assumptions about the future of transportation, and the energy systems that turn our wheels, are becoming more Jetson-esque. Peter Tertzakian of Oilprice.com tries to distinguish the reality from the hype. “An electric car is not like a smartphone or a Netflix subscription.”
The excitement is palpable and as a technology junkie I love it. Auto shows are rolling out new electric vehicle (EV) models; China says it’s planning on banning internal combustion engines (ICE); and Daimler is jockeying with Tesla in the budding electric truck segment. In the battery world, lithium prices have reached an all-time high on anticipated demand growth. In tow with all the EV news, there is a trailer full of autonomous vehicle talk that makes me think that 1950s Popular Science articles were real after all.
But it’s time to take our foot of the accelerator and make sense of it all.
For the next several columns I’ll be looking at what the pundits are saying, characterizing and examining all assumptions, and putting things into pragmatic context.
Parrying against the sunny alt-transport news, there is a cloudy, competitive reality. Global oil demand is ratcheting up at near-record pace
I know one thing for sure: this is a very complicated and contentious subject. There are no easy parallels. An electric car is not like a smartphone or a Netflix subscription. For one thing, neither had much competitive resistance.
Parrying against the sunny alt-transport news, there is a cloudy, competitive reality. Global oil demand is ratcheting up at near-record pace. A couple of weeks ago, the International Energy Agency put our oil-addicted world on track for a 1.6 MMB/d of growth this year over last (the 20-year average is 1.2 MMB/d per year).
For 2018, analysts are already starting to escalate their oil growth forecasts. The lesson shouldn’t be lost on any of us: Never underestimate the consumer’s ability to overindulge in cheap energy commodities.
“Death of the Combustion Engine” and the “End of Oil” headlines are increasing in frequency on the promise of better, cheaper EVs with greater selection. Yet the actual data trends for ICE car sales and oil consumption are like pistons firing in the other direction, revving harder and racing away from any speculative eulogies.
What to believe?
There is little debate in my mind that big changes are forthcoming to our energy systems and transportation paradigms. For context, let’s think about how big is big?
The biggest transition ever
Just the scale of what’s in play will challenge many assumptions and forecasts. As the baseball philosopher Yogi Berra once said, “It’s tough to make predictions, especially about the future.”
When it comes to oil and autos, big is a word that is not big enough. Transitioning not one, but two of the largest industries in the world simultaneously is unprecedented. Both have multi-trillion-dollar roots as tough as oak trees.
Our daily dose of oil momentarily touched 100 million-barrels-a-day in June. I estimate we’ll sustain past that incomprehensible century marker by the middle of 2018. That’s the equivalent rate of burning an ultra-large supertanker of oil every half hour.
From a sales perspective, the top 10 integrated oil and gas companies recorded annual revenue in excess of $US 3.1 trillion per year in 2015. For comparison, the top 10 technology companies add up to $US 1.3 trillion in sales and they sell a lot more than just smartphones.
There are over 1.2 billion ICE-powered vehicles on the road today. If the average vehicle is modestly worth $US 20,000, that represents a potential fleet turnover of $US 20 trillion. Electrifying this fleet on a fast track won’t be limited by technology (it never is). Aggressive adoption scenarios will be a function of many other considerations; for example, who will compensate car owners for trillions of dollars of devalued capital stock?
Change one small assumption in the decades to follow and the forecasts are out by a couple hundred million electric vehicles and several million barrels of oil per day
And the capital stock of a billion-plus vehicles isn’t static. After scrapping 40 million clunkers every year, the overall vehicle fleet is still expanding at a rate of 50 million vehicles annually, 99 percent of which are still ICE-powered. Like oil, autos are big business too: Off the assembly lines, the top 10 conventional automakers generate $US 1.6 trillion in sales worldwide.
Oil and gas plus conventional vehicle sales adds up to more than $US 5 trillion per year of business. That’s a big tree to shake. The multi-trillion-dollar scale of what’s in play is unlike any other we’ve seen. So, even modest shifts in the way we turn our wheels will be hugely impactful.
Many unknowns are in play. Will the world be driving 1.5 or over 2.0 billion vehicles by 2040? How many kilometers will each person be traveling, on average? At what rate will people switch from ICE to EV? Will EVs be full or partial substitutes for each of the various wheeled transportation segments? What will the value of a used car be?
Change one small assumption in the decades to follow—for example, how long people hold onto cars before trading them in—and the forecasts are out by a couple hundred million electric vehicles, several million barrels of oil per day, and hundreds of millions of tons of carbon per year.
Editor’s Note
This article was first published on Oilprice.com and is republished here with permission.
[adrotate banner=”78″]
Barney says
In the short term, it doesn’t really matter to the EV how much the combustion engine market grows. EV are substantially cheaper to make and maintain, and electricity is substantially cheaper than liquid fuel. And EVs have strong political backing.
So EVs are likely to continue double digit sales growth for some years to come. Much of this will come from niches — fleet sales, various non-passenger applications etc.
As the fleet grows, it will start applying price pressure to the combustion engine market. It won’t so much be customer choice that ends the story — the manufacturers will push the market to EVs to keep there margins up. Meanwhile capital for new oil exploration will dry up.
It’s impossible to say how long this will take, but here’s a clue — watch for EVs filling niches, like Teslas suddenly dominating the luxury performance niche. The more dissimilar niches EVs have successfully filled, the more likely they are to suddenly take over mainstream sales.
Nigel West says
Barney, where did you get all that fake news from?
EV’s are not substantially cheaper to make, actually they are much more expensive to make. That’s why they are more expensive to buy and Governments are having to offer subsidies to tempt buyers. ICE cars are so good and reliable these days maintenance costs are not a factor anymore.
EV’s are low volume and low margin for car makers with big upfront design costs that might not be recovered in sales. European makers are only pushing them because the EU will fine them if their fleet sales CO2 bubble >130g CO2.
The Tesla Model S is five years old and is an expensive niche vehicle that poses little threat to true luxury car makers like Jag., Merc., Audi and BMW. Tesla will struggle once luxury makers decide to enter the BEV market – if and when customer demand makes it worthwhile.
Are Hansen says
Sorry, you have not been following the markets closely. In fact, the Tesla Model S have taken a large part of the luxury car segment.
More interesting is the mass market. As I guess you noticed, 400.000 people ordered and paid a $1000 deposit for the Tesla Model 3, over a year before production started. This is higher than ever in the auto industry, and has been a strong incentive for the established auto makers to make a move.
Yes, EVs are currently more expensive to make. But the total cost of ownership (TCO) is much lower. One thing is that electricity is way cheaper than petrol/diesel in most markets, but mostly because maintenance costs are much lower. Simply because an electric motor is way less complex, and the only thing that really gets worn is the ball bearings.
We can feel whatever we want about all this, but the reality is that the electrification of transport is now unstoppable. Mostly drive by the huge air pollution problems in the world’s great cities. And battery costs keeps falling fast, energy density increases
Nigel West says
Are, you also like fake news it seems. Tesla Model S sales are only about 2000 cars a year in the UK. So your claim it has taken a “large part of the luxury segment” is way off.
I suspect most of the Model 3 pre-orders are N. American. Over 10% of pre-orders were cancelled too.
75% of UK buyers change their cars every three years. The premium price for a BEV is not worth paying as the TCO saving is over > 3 years i.e. not a factor when buying new. A new BEV is at least 25% more expensive than the equivalent ICE even with subsidies.
You need to look at European car makers strategy for future cars to see where things are heading. That is to produce common car platforms that can take either an ICE, hybrid or BEV drivetrain. Unless there are step change break throughs with battery energy density and costs, hybrids will remain more attractive than BEVs.
Stephen Woodhouse says
Cards on the table : I believe EVs will overtake ICEs much faster that popular wisdom would have it. Acceleration over top speed will win people over.
But we need to be careful about comparing the cost of fuel. There is a substantial tax on petrol and diesel, and I don’t believe that governments will give up on taxing transportation.
Independence 01776 says
EV’s are cheaper to make. Tesla Model 3 is a better car than comparable models in it’s price range. So is the Nissan Leaf. You can still make an argument, but when you add operation and maintenance cost of an additional $1,000 per year you see them as very comparable, if not better values. Also, Tesla gross margins are in the 25% range, 5x compared to their ICE competitors.
ICE vehicles have been around for a long time and enjoy large markets with associated economies of scale. As the shift to EV’s increases, this imbalance of economies of scale will quickly favor EV’s, simply because they have 1/3 the parts of the comparable ICE vehicle which doesn’t require and engine, an exhaust system, a coolant system, and complex drivetrain with transmission, etc.
Nissan lowered the price of it’s 2018 Leaf by $5,000, Tesla did similar with it’s Model X. You won’t see this with ICE vehicles, but you will with EV’s as scales increase and technology improvements lower battery cost and overall cost of manufacturing.
My bet is in 5 years, EV’s make up more than 50% of the light vehicles sold and the reason is because in 5 years, the price will have dropped another 30%. The competition will be fierce and those auto manufacturers that haven’t shifted quick enough into the EV market will be going out of business.
See Stanford Prof. Tony Seba youtube video on Distruption in energy and transportation for an eye opening view to what I poorly try to point out here.
Alkè says
Things are changing faster for what concernes transport. People are becoming more incline to leave their traditional vehicles for an electric one. But, why? I’d like to think that is because of the increasing pollution made by cars, but it is not. Tesla is the reason why people are into sustainable mobility and electric transport!