Electric cars hold the potential to destroy the oil business and save the electricity business. The big question now is when this will happen. Last year the world consumed about 93 million barrels of crude oil per day. About 42 percent of that, or 39.5 mmbpd, was used for transportation.
In its recent price swoon, oil prices went from over $100 per barrel to under $30 per barrel with a production surplus of 2 mmbpd worldwide. How would the industry fare with a surplus that was seven times greater? Related: Oklahoma Oil Industry About To Lose Tax Rebates
The central question here is the rate at which electric vehicles are able to penetrate the worldwide transportation fleet. Navigant Consulting has done some of the heavy lifting here and we use some of their data. They assume EVs displace a modest 0.3 mmbpd of crude by 2020, 3.4 mmbpd by 2030 and 13.8 mmbpd by 2040. This assumes 7 million EVs on the road by 2020, 97 million by 2030 and 319 million by 2040.
It makes sense that electric utility executives are rooting for EVs. The industry's sales picture has been dismal. With increasing energy efficiency, customers do more with less. Renewable interlopers, aided by all sorts of subsidies, have taken business from the legacy electricity providers. What's more, some big consumers want renewables, despite their cost, because they want to reduce their carbon footprints.
Third, new technologies make it easier for customers to reduce their dependence on the grid. Clearly the electric industry needs a big, new customer base to goose up its prospects. Electric car owners look like the best prospects around, a potential game changer for the electric industry. Every time Tesla or GM release a new model, electricity executives must salivate in anticipation of the new sales.
Let's start with the potential. No econometric projections. Just simple arithmetic. Roughly speaking, a car travels 100 miles on 34 kwh. Vehicles in the USA travel about 3.15 trillion miles per year. If all cars drove on electricity, they would require 1.07 trillion kwh, or 29 percent of current electricity sales. So electric cars would be a big deal if all cars went electric. Related: Russia Remains Determined To Stop Israel-Turkey Pipeline Deal
But last year, electric cars accounted for less than 1 percent of new car sales. Nobody really knows how to predict sales of a new product. Some, like the iPod, iPad and iPhone take off quickly. Others take a long time, and so far the electric car appears to be in the latter category. It needs infrastructure that not many entities seem in a hurry to build.
So, let's make a few generous projections: electric market share averages 2.5 percent over the next five years, and 10 percent thereafter. Based on those calculations, electric cars will comprise 6 percent of the vehicle count and will add less than 2 percent to the current level of electricity sales.
Now we run into a complication, another technology out there, making major inroads into the market: LED lighting. Lighting accounts for roughly 15 percent of electric sales. LED lighting is enormously more efficient than alternatives and is taking market share fast. Installation of LED could, within 10 years, knock 7 percent off current sales. With this in mind it appears that LED looks like a sure thing while electric cars do not.
Too bad, because electric cars have some attractive characteristics aside from reducing air pollution and making buyers feel environmentally virtuous. For instance, if it charges at night, it creates off peak sales. The electric car, also, can act as an electricity storage device, just what the industry needs to store renewables. Related: Brazil's New Foreign Minister Suspected Of Dubious Dealings With Chevron
More than likely, the owner of the electric car would want to buy renewable energy, too, making the purchase really green. Imagine signing up for wind power (generated at night in many places) and charging up the car at night. Some firm within the electricity business would benefit from that arrangement, but not necessarily the conventional generator. Maybe a smart entrepreneur or even the automobile manufacturer will prepare an electricity package for the car buyer. The local utility might have to upgrade its equipment, which is currently not designed to run all out day and night, and the return on that equipment might be all it gets from the new customer.
So, the electric car, if it takes off, could become a game changer for the electric industry, maybe not in the short-term, and not necessarily for the incumbents unless they can package the solutions desired by the new buyers. In the meantime, those of you waiting for the electric car payoff might want to consider Ambrose Bierce's definition of patience, "A minor form of despair, disguised as a virtue." That change in game may be some time in coming.
By Leonard S. Hyman and William I. Tilles for Oilprice.com
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Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and… More
Comments
So this will not need much increase in the installed capacity. So there will never be a concern for any shortage of electricity.
A few thoughts in response to our commenters:
1) Cantal-We agree range could be a tipping point for EV acceptance. But we also believe that cost (a "tank" of electricity is cheaper than a tank of gas) is also important. Other things we would look for is car companies to retrain service employees to work on EVs, reduction in vehicle weight to improve range and improved access to battery charging infrastructure. Lastly expensive gasoline/cheap electricity or vice cersa should also play a role in EV acceptance.
2) Rick Bronson-We would only point out that the distribution networks were never designed to run full out on a 24/7 basis. Assuming a rapid transition to EVs we would expect the need for some infrastructure upgrades in this area but nothing too financially challenging.
3) Drew-Yes and perhaps No. Yes, the big indexed stock portfolios do own all the same things (coal, oil, electric cos). Although some like Norway's national fund are exiting fossil fuel investments. However, for us things could become quite "interesting" at some point in the future when EVs meaningfully displace internal combustion engines (ICEs) (perhaps around 2030-2040). At that point the electric companies' gain should mean a corresponding loss in crude sales for the oil companies.
4) EdBCN-We believe, perhaps naively, that better, cheaper products tend to displace competitors over time. Hence our belief that LEDs displace incandescents. As for EVs replacing ICEs, we're not suggesting it won't happen. To us it's a question of when. We strongly believe that major technological changes, the likes of which we're discussing here, could take decades (20-30-40 years) to become fully implemented. And a lot could change in that period. As our favorite philosopher Mr. Y. Berra once said, "Prediction is hard, especially about the future".
Many thanks for the comments.
Bill T./Len H.