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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Electric Cars - An Existential Threat For Oil?

Tesla plant

Nobody would have predicted ten years ago, back when everyone was talking about Who Killed the Electric Car, that oil would someday have to fear the future of General Motor’s EV1. Practically none of the 1,117 units were still in commission in 2006 when the movie first aired, but today there’s a whole new fleet. In fact, oil majors are worried that electric powered cars could soon replace traditional combustion engines.

Electric cars are becoming more numerous every day.  Despite rapidly growing sales, this past October, EVs represented only about 0.17% of energy consumption in the transportation sector.  A recent study shows that EV prices are declining faster than anticipated and that oil demand could peak by 2020.  This would be brought on by EVs reaching price parity with ICEs.  Carbon Tracker and the Imperial College of London were quoted saying “This growth trajectory sees EVs displace approximately two million barrels of oil per day in 2025.”  Such a captivation of the oil market reminds oil traders of the OPEC price war in 2014 that has lead to the recent need for supply cuts, three years later.  

The report published earlier this month seems quite optimistic, especially to oil majors. Shell doesn’t think demand with peak for another 5 to 15 years and Exxon gives oil till 2040. Saudi Arabia estimates they have enough oil reserves to last another 70 years. The alternative to these forecasts is grim. It could pose a serious issue for oil companies if demand were to slow.

If there’s any chance for survival, firms will need to change with the times. Shell has potential for a future, having already begun diversifying into natural gas and biofuels. Renewable energy must become a priority for these oil empires. Saudi Arabia, the world’s leading exporter of crude, could soon be known for solar panels production. Other companies will need to follow suit.

To some, such an impending shift would be beneficial. There are 194 countries that have signed the Paris Accords, aiming to reduce climate change. Further development of EVs would be extremely advantageous to participating governments. To meet these reduced carbon emission levels, the EPA has required all cars must achieve a fuel efficiency of 54 miles per gallon by 2025. President Trump has expressed an interest in potentially withdrawing from the agreement. Investors should prepare for such a decision because, if pursued, there would likely be a price jump in oil and automobile companies.

Long-term investors should consider stocks such as Tesla and General Motors, both excelling in the EV industry. Tesla’s ambitious Elon Musk ultimately plans to integrate solar panels into the roofs of cars. The advances are unending as are these company’s growth, evident in their stocks. It would be quite plausible for investors to finance these shares by shorting oil companies or the commodity itself. In the short term, oil prices are expected to rise with the ongoing supply cuts. Companies like Suncor and TransCanada have favorable conditions with their expected growth. A long-term spread using derivatives on any major oil company would be a viable option as well, capitalizing on short-term returns.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Dan on February 06 2017 said:
    If these very,very expensive cars were free, yes. If not, no.
  • GregSS on February 07 2017 said:
    Dan: These cars are getting cheaper all the time. How much effect they'll have on oil has yet to be determined, but their numbers are increasing and that can't be good for oil over the long run.
  • Joe on February 07 2017 said:
    Michael, you reported that all cars must achieve a fuel efficiency of 54 mpg by 2025. Not true. The fleet average must be 54 mpg, not all cars. But, you are correct in that President Trump will probably pull out of that agreement.

    Oil demand peaking by 2020? The bookies in the U.K. Will be taking bets on this one.
  • Tom Turrentine on February 07 2017 said:
    Looked through the EIA report, can't find source of statement that "5% of transport energy is now from EVs" That is probably not accurate. Probably more like .5 % or less.
  • David Hrivnak on February 07 2017 said:
    I fully believe this as we have made the switch. I will never buy a car without a plug. The fuel savings (electricity is like $.85/gal), lower maintenance and better performance make EVs better in the long run. Then we also love the fact we can make our own "fuel" cleanly and easily from rooftop solar.

    Now when I have to drive a gas car I feel like I am using a rotary phone.
  • Adrian on February 07 2017 said:
    Norway remains a leading indicator, with > 50% of LDV sales in January being electrified models (BEV, PHEV or plain hybrid).

    Sweden, 5.2% of LDV sales in January.
    UK, 4.2% of LDV sales in January.
    America? Well America has always been "special," but we'll catch up eventually. It may take a Tesla pickup truck to move the needle here. 3.5% in California for January, though...

    The S of the technology adoption curve is starting to ramp, exponential growth in market share follows...
  • Per Finsaas on February 07 2017 said:
    Fine, but for one thing: where is all that electricity going to come from? Fusion? Not by 2020.
  • Jeff on February 08 2017 said:
    Hilarious article.
    1. EVs did NOT reach 5% energy in the transport sector. That's either a typo or ignorance.

    2. Oil demand will NOT peak by 2020, which is three years from now. Whoever told you that, write down their name and never ever listen to their idiocy again, not worth your time or the embarrassment of repeating their claim. If,you have question then do some basic research.

    3.
  • David Witheld on February 08 2017 said:
    A couple of things.

    First, just as a general statement. If it requires a government subsidy, either directly or through the tax structure, it ain't a good investment. It really is that simple.

    Second, if I lived in a city and commuted a matter of blocks I'd have one of those cute little rascals, I really would. But my commute is 37.6 miles, one way, and so I'll stick with my GMC Yukon, enjoy the comfort, the safety, and pay for the gas.

    Third, it's a funny thing about the oil bidness. They get better and better. The first pass at shale required oil to be around $100 a barrel. Last I saw, with current technology in fracking about $50 makes it worth while to drill. This will keep drifting down as technology improves further and as a sane administration stops trying to stop any development.

    I'm a fan of electric cars, I really am. But they ain't a big deal in a nation the size of the U.S. I can drive from my house to visit my Granddaughter with one stop for gas that takes me about 15 minutes. The same trip, even in one of Elon's Teslas with it's advertised (and probably wildly optimistic) 200 mile range would require one stop for about eight hours (or just two if there was a supercharger station). I'll still stick with the Yukon.
  • TAS on February 08 2017 said:
    Unless electric airplanes are in our immediate future, I would say the answer is an emphatic "NO"
  • mike on February 09 2017 said:
    There are a lot of things to consider here with oil demand. First of we have a huge percentage of the global population still in poverty using a tiny sliver of the oil the developed world uses. Think about all the people in India,China, Southeast Asia, Sub Saharan Africa and so on who will hopefully attain western standards of living in the coming decades. The demand for plastics and other petrochemicals will grow. Fuel for trucks, ships, planes all will grow. Gasoline demand will certainly grow for some time to come even if EVs become competitive. We must realize that many places in the developing world dont have a reliable power grid. Beyond that we have population growth which will be adding several hundred million new humans to planet earth in the next few years, they will consume plenty of resources.

    In the developed world things are a bit different. Here in America especially, our economy is pretty inefficient when it comes to oil use so demand has plenty of room to shrink from plug ins and EVs as time goes on. It will of course take some time for EVs to be cost competitive with internal combustion cars and even more time for consumers to really take to them. The technology is advancing quite fast so it will be interesting to see how it plays out.

    You can fill a gas tank in 5 minutes and go 300-400 miles easy on that. An EV that would take an hour to charge, with basically half the range is a significant inconvenience for many people in comparison. Lets also not forget that not everybody is a rich Tesla owner who has a garage. Many people rent apartments or share housing and have to park on the street. EVs would be a hassle for them.

    2020 for peak is a joke. I am not in the car industry but I am pretty sure it takes more than 3 years for a car manufacturer to design a new model so unless every single car company is going gang busters to have a whole fleet of EVs ready in 3 years thats just ridiculous. There will some selection of EVs in 2020 but not many. Even if battery tech makes EVs cost competitive with internal combustion engines BY 2020 you are talk several years for car manufacturers to scale up production of them and to start getting enough on the road and sold to really dent oil demand. My guess is we have at least another 10 years before demand peaks.

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