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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Chinese EV Boom Could Crash Oil Prices

EV

The rapid adoption of electric vehicles could cause oil prices to fall to $10 per barrel in less than a decade, according to the CEO of Longview Economics.

EVs are gaining traction, and although they still only make up a small fraction of the auto market, more and more analysts are starting to buy into the notion that EVs will quickly gain a foothold over the next decade or so, with massive ramifications for the oil market.

There has been a sea change of sorts in just the past year or two, with EVs going from a niche idea even in long-term forecasts, to one that many believe will increasingly take market share from the traditional internal combustion engine. There are many reasons for this – policy and market forces are reinforcing each other to bring the EV revolution closer and closer.

The falling cost of batteries have made EVs much more competitive, and EVs could become cheaper than gasoline or diesel-powered vehicles between 2025 and 2029, according to Bloomberg New Energy Finance (BNEF). BNEF predicts that EVs will capture than half of all new auto sales by 2040.

But government policies could accelerate this trend. The UK and France have announced a phase out of the internal combustion engine, banning their sales by 2040. China and India have also announced tentative steps in that direction, which, if finalized, would totally change the game.

Related: OPEC To Take Drastic Action Despite Shale Slowdown

And China could go a long way by itself in accelerating this transition. As the world’s largest auto market, China’s EV policy, which is still being formulated, could supercharge the race for EVs. The massive investments planned for EVs, combine with restrictions on dirtier forms of transportation, all done within a top-down economy, could spark rapid change. “They can order charging stations set up all over China, dictate driving and licence plate restrictions in major cities,” a western auto executive told the FT, drawing a clear contrast with what can be done in western economies.

China has several serious motivations to go big in EVs – it is the world’s largest oil importer, many Chinese cities suffer from horrific pollution, and the Chinese government also sees an opportunity in becoming a top EV manufacturer and exporter. To achieve this objective, China aims to be producing 7 million EVs per year by 2025, and will spend upwards of $60 billion on EV subsidies between 2015 and 2020, according to the FT. The potential phase out of gasoline and diesel vehicles in China will also dramatically alter the trajectory for EVs.

While the bans may seem far away, they send a signal to automakers that they need to prepare for a post-fossil fuel auto market. Already, a growing number of car manufacturers are announcing major changes in their fleets, and they will roll out a tidal wave of new EV models in the next five years.

It will only take a small change in oil demand to upend price forecasts. After all, prices crashed in 2014, falling from $100 per barrel down to $50 in less than a year. That occurred with a supply surplus of only around 2 to 3 million barrels per day (mb/d). In that context, the prediction from BNEF that EVs will erase 8 mb/d of oil demand by 2040 should send chills down the spines of oil executives. The exact point we reach peak oil demand is obviously very debatable, but in general, the mass adoption of EVs could permanently keep oil prices low, even under some relatively modest assumptions about the growth of the EV market.

Seeing the writing on the wall, some oil companies are not sitting idle. Royal Dutch Shell, one of the largest oil and gas companies in the world, just decided to purchase NewMotion, a Dutch provider of EV recharging stations. The acquisition of the largest EV recharging station owner in Europe is clearly a hedge against peak oil demand. Shell also said that it would install EV recharging equipment at tens of thousands of its retail gasoline stations. Reuters reports that BP has also been in talks with EV recharging providers about installing equipment at their retail refueling stations.

Related: The Next Big Digital Disruption In Energy

It is not a coincidence that Shell has some of the most aggressive forecasts regarding the pace of EV growth out of all the oil majors. Shell’s executives have predicted peak oil demand within a decade.

Chris Watling, CEO of Longview Economics, has arguably has the most aggressive forecast out there, predicting crude prices will collapse to $10 per barrel in the next six to eight years. He puts the Saudi Aramco IPO in that context, arguing that the Saudis are trying to monetize their assets before everything unravel. "Well I think they need to get it away quick before oil goes to $10 (per barrel),” he told CNBC in response to Saudi Arabia’s motivation to list a part of Aramco.

While few others see such dramatic upheaval, there is a growing consensus that the EV revolution is coming faster than many expected.

By Nick Cunningham of Oilprice.com

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  • Disgruntled on October 16 2017 said:
    Oil at $10/bbl provides plenty of incentive (75 cents/gallon gasoline) to keep using ICE vehicles and even increase demand since it's so cheap to drive. That said, $10/bbl oil also provides plenty of incentive to shut in unprofitable oil production thus restricting supply and consequently eventually raising prices. Can't wait to see the future unfold!
  • Jeffrey J. Brown on October 16 2017 said:
    A contrary point of view:

    What The Peak Oil Demand Group Is Missing - Part 1

    https://seekingalpha.com/article/4109381-peak-oil-demand-group-missing-part-1

    Summary

    Demand for oil has increased every single year since the 2008 recession. In spite of EV sales, the global non-EV fleet keeps increasing. Rapid, or even rabid, (EV) growth will take a long time to stop the ICE fleet from expanding.

    The market makes the news. Negative price action begets negative stories, and vice-versa. The media is hooked on causality and will go to great lengths to establish a link. The last 6 months have seen oil prices remain steady in spite of OPEC cuts leading to the "Peak Oil Demand" stories.

    The argument there can be summed up in 3 main points.
    • Renewable energy push will decrease demand for oil.
    • Banning of internal combustion energy (ICE) vehicles will decrease demand for oil.
    • Global oil consumption has likely peaked, and coupled with increasing shale oil supply, will keep prices depressed forever.

    In all likelihood, oil prices will be significantly higher down the road, and we predict 24-36 months at most till "peak oil" stories make their appearance.

    Conclusion

    The global macro backdrop of fast economic growth, coupled with spending cuts across the board on oil & gas exploration, is setting up the stage for significantly higher prices down the line. The media is still driving looking in the rear-view mirror. We think there are some fantastic opportunities today in the oil & gas sector, like this one which we recently wrote about. In Part 2, we will explore why even the regular increased demand forecasts could be extremely conservative.
  • Jeffrey J. Brown on October 16 2017 said:
    Then, there are supply side issues:

    GNE = Global Net Exports of oil, i.e., the combined net exports from the (2005) top 33 net oil exporters, total petroleum liquids (BP + EIA data)

    GNE has been at or below the 2005 rate of about 45 million bpd for 11 years, through 2016.

    ANE = Available Net Exports, i.e., the volume of GNE available to importers other than China & India. ANE = GNE less CNI (Chindia's Net Imports).

    ANE fell from 40 million bpd in 2005 to 33 million bpd.

    The following graph shows the decline in the GNE/CNI Ratio from 2002 to 2016:

    http://i1095.photobucket.com/albums/i475/westexas/GNECNI%20Ratio%202002%20to%202016_zpswuwvgp8m.jpg

    There are approximately 155 net oil importing countries. At a GNE/CNI Ratio of 1.0, theoretically the China region alone would consume 100% of GNE. At the 2005 to 2016 rate of decline in the GNE/CNI Ratio, the GNE/CNI Ratio would hit 1.0 in 2033, in 16 years.
  • Jeffrey J. Brown on October 16 2017 said:
    Slight correction:

    At a GNE/CNI Ratio of 1.0, theoretically the CHINDIA region alone would consume 100% of GNE.
  • anton on October 21 2017 said:
    Electric cars require oil for mining, manufacturing, and shipping. The same goes for most manufactured goods.

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