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Why The Electric Car Boom Could Cause Another Oil Price Crash

Tesla assembly line

A 2014-style oil price meltdown could occur again. Only this time, instead of a sudden surge of supply, the culprit will be the fast adoption of electric vehicles, which will cut into oil demand enough to cause prices to fall.

That prediction comes from Carbon Tracker, a think tank that has repeatedly warned about the prospect of fossil fuel “stranded assets,” due to the rise of clean energy and increasingly restrictive climate policy. In its latest report, Carbon Tracker envisions a scenario in which 2 million barrels per day of oil demand are erased by 2025 because of the penetration of EVs in the transportation sector.

Reducing global oil demand by 2 mb/d may not seem like much, but it is equivalent to the supply overhang that triggered the 2014 oil price meltdown. It does not take a massive discrepancy between supply and demand to crash prices. The report also cites the 10 percent loss in market share for the U.S. coal industry over the past half-decade, causing an utter collapse in the finances of most U.S. coal producers.

At the heart of the forecasts are when EVs will be cost-competitive with the internal-combustion engine, and how quickly consumers will make the switch. Carbon Tracker says that EVs will reach that threshold by 2020. And by 2025, EVs will make up about one-fifth of the entire vehicle market.

There have been a growing number of dire predictions for oil prices because of the rise of EVs. Bloomberg New Energy Finance laid down one of the earliest and boldest markers last year, detailing a scenario in which EVs eliminate 13 mb/d of oil demand by 2040, enough to keep prices permanently low. Carbon Tracker goes further, arguing that oil demand could drop by a steeper 16 mb/d over that time period. Related: Oil Prices Stuck In Narrow Band, Capped By U.S. Shale Threat

The oil industry has more modest figures. BP says it’s possible that EVs kill off 1.2 mb/d of oil demand by 2035. The Paris-based International Energy Agency (IEA) is similarly unimpressed, expecting EVs to only displace 1.3 mb/d of oil demand, while still expecting overall demand to rise because of demand in other non-transportation sectors – freight, aviation and petrochemicals.

A Royal Dutch Shell official recently hinted that his company was more concerned, suggesting that oil demand might even peak within the next five years. However, aside from the company’s substantial foray into natural gas, it is not backing away from oil in any significant way.

But Carbon Tracker thinks many of these analysts and companies are way off the mark. According to its forecast, total global oil demand could reach an absolute peak in 2020 and then plateau for the next decade.

While such a scenario is far from assured, it is something for which few companies and governments are preparing. Most energy forecasts have a business-as-usual assumption of steadily rising oil demand, stretching out for decades. Related: The Oil War Is Only Just Getting Started

Based on this assumption, hundreds of billions of dollars are funneled into assets that might not be profitable if the world is taken by surprise by innovation in EVs and other clean energy technologies.

If oil demand adheres closer to the Carbon Tracker forecast, it would almost certainly cause another downturn in prices, only this time it would be permanent. EVs would only continue to gain market share over time, forcing oil into permanent decline. The “peak oil” conversation is now decidedly about when the world will hit peak oil demand, rather than peak supply.

Again, EVs do not have to capture 100 percent of the market to cause a financial crisis in the oil industry. Carbon Tracker cites the 10 percent threshold as key. A “10% shift in market share can be crippling for incumbents,” the report says. That threshold could very well be reached within a decade.

By Nick Cunningham of Oilprice.com

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  • JHM on February 02 2017 said:
    Hey, it's not just small cars. Last year China produced 115,700 electric busses with 8.85 GWh of batteries. This is 67% growth in the global fleet of electric busses.

    If well utilized, this fleet of 289k electric busses can offset some 64 kbpd of diesel.

    While electric cars may get more attention, heavy vehicles are also being electrified and have a much bigger impact on fuel demand per GWh of batteries, about 3kbpd/GWh.

    So this is happening.
  • Tsapki Perez on February 03 2017 said:
    These cars cannot come into play fast enough. The sooner we are allowed to have alternatives to oil and the ever more desperate and harmful new procedures to keep the ancient beast that is the fossil fuel industry going, the sooner we can put some serious effort into environmental conservation again.
  • Matthew Biddick on February 03 2017 said:
    I just want someone to run through the exercise of where all of the electricity will come from to recharge those batteries practically every day. Electricity is not some magical form of energy that is just "out there" to be had. Something has to glow, flow, or blow to generate electricity. I maintain there just isn't enough flow and blow to get the job done. As for the glow from solar, are they going to paper over the entire western US with solar panels to displace the oil?
  • Dan on February 03 2017 said:
    Ha,ha. I knew it was Nick even before opening article. Pay to play. I've only seen one electric car in years. Not totally electric but still fits into Nick's mind. So let's say I see 2 total in the next 10 years, Nick can say they are up 100 percent.
  • EdBCN on February 03 2017 said:
    I think the Carbon Tracker prediction is most on target in terms of the timing of EV uptake, but oddly it may lead to oil scarcity rather than surplus. My thinking is this: We've now had two solid years of under investment due to low prices which will probably persist through another year. By the end of 2017, with oil prices still low and several new models of reasonably priced EVs selling very well, not to mention buses and trucks (which seem to be taking off) there will be an increased hesitance to invest in new oil production. The 'normal' increase in investment that would usually accompany the end of a bust might not happen. But the existing fleet of vehicles is very large and will take a long time to replace, even if the uptake of EVs is very rapid. To put it another way, the perception of the impact of EVs on oil demand will arrive much sooner than the actual impact. That, combined with the years of under investment we've already had might lead to extreme under investment and scarcity.
  • EdBCN on February 03 2017 said:
    Dan: I don't know what rock you live under, but where I'm from it seems like every third car is an EV. Quite a few of them self-driving as well. And the place I'm from is famous for being a trend-setter that everyone else follows after a few years.
    Matthew: That computation has already been done. The experts say that EVs, assuming they mostly charge at night, won't put any strain on the grid until they comprise most of vehicles on the road. It turns out that when you use a drivetrain that's 85% efficient you need a lot less power than one that's just 25% efficient.
  • Oilracle on February 03 2017 said:
    --"increasingly restrictive climate policy."...

    All affected hurricanes spin in horror now!!
  • ralfy on March 01 2017 said:
    The catch is that not only is oil needed to make electric cars, most people worldwide barely have access to any type of car.

    Just to provide cars (electric or otherwise) to most people worldwide, we will need much more oil than what is produced.

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