In the wake of the public presentation of Tesla's new Model 3, it's worth rethinking what the future of automotive transportation might look like. Two precepts that have been widely held by many experts are now worth calling into question.
First, it had been assumed all along that electric vehicles were going to take decades to become mainstream, especially since total EV sales in the U.S. last year were only around 115K vehicles. In the first 36 hours after the Model 3 was announced, Tesla took reservations with a $1,000 deposit for more than a quarter of a million Model 3s. Tesla has plenty of critics and plenty of fans, and there is no reason to argue over the company's value or prospects at this juncture. Related: Bankruptcy Rout Looms Despite Impressive Productivity Gains In U.S. Shale
What is clear and indisputable at this point is that there is a significant demand for mass market EVs even with gas prices low and no actual mass market EV models available from a popular automaker. If EVs do take off, it will be unambiguously bad for oil demand and hence prices over the next few decades.
That fact might be partially offset by another reality that is becoming increasingly clear; the future driver of the automobile is not a human being. Tesla's self-driving cars technology is very impressive, and it only costs a few thousand dollars to install. Just as importantly, Tesla is far from the only company working on this tech. From small start-ups to behemoths like Google, almost everyone is working on self-driving vehicles and there are measurable indications that huge progress is being made. Self-driving cars appear set to debut in numerous car models over the next decade, and Tesla's Model 3 announcement shows that the technology will not be isolated simply to high end vehicles. Related: Saudi Arabia Tries to Slow Iran Oil Exports, Without Much Success
This is a major technological advancement that will revolutionize the way Americans travel. There has been a lot of chatter in some quarters about a lack of significant technology breakthroughs in recent years, but advances like self-driving cars call that thesis into serious doubt. Self-driving cars and presumably tractor trailers are likely to fundamentally change the way goods are shipped and the way people travel.
In particular, to the extent that self-driving tech allows truck drivers to be replaced, it should lower the cost of shipping goods, which in turn should mean shipping things is more efficient and hence the amount of goods being shipped increases. Similarly, if people no longer have to do the work of driving themselves, but instead can sit back and relax while a computer drives them from place to place, then people are likely to be willing to travel and commute more often and further. This is simple economics - as costs fall, quantities of a good or service used (demanded) rise. Related: Oil Prices See-Saw After Friday's Rout
As the price of driving gets cheaper, more driving will be done. This in turn could lead to more oil consumption - assuming the driving in question is being done in a conventional car rather than an EV. So the tension for investors really comes down to which trend will dominate; the adoption of EVs or the advance of driverless technology?
Now of course it's worth noting that even if gasoline use in vehicles does fall as conventional cars are phased out, EVs still have to get electrical energy from somewhere. That means that much larger amounts of electrical generation capacity will be needed, especially as the amount of traveling increases thanks to driverless cars. Fundamentally, economic principles are suggesting that either a lot more oil or a lot more electrical power will be needed in the future to meet transportation needs. Investors have to decide which scenario they envision occurring first.
By Michael McDonald of Oilprice.com
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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… More
Comments
2015, there are about 1.3 million EVs. About 25 EVs displace about 1 bpd of oil demand. Growing EV fleet 50% annual leads to 50 million EVs in 2024. So the oil displacement is about 2 mbpd in 2024 and 3 mbpd in 2025. Oil will find it very hard to cope.
Adding 25 million EVs and displacing 1 mbpd of oil demand only requires about 250 GWh per day. So 60 GW of solar or 40 GW of wind will suffice to energize these vehicles. Given that about 130 GW of wind and solar were installed last year and that these are growing 30% annually, adding 60 GW in 2025 to cover incremental electricity needed for EVs will a trivial task.
Even at today's price for utility solar, 60 GW would only cost about $80B to supply the offset of 1 mbpd for 25 years, about $8.77 per barrel replaced. And the cost of solar is expected to continue to decline. Thus, oil will come under tremendous price pressure from renewables as EVs scale up. Wind and solar have capped the price of natural gas. With a sufficient fleet of EVs, they will cap the price of oil as well.
You are missing, large, large pieces of the emerging picture.
Uber didn't hire away the majority of Carnegie-Mellon's robotics department to create gasoline-powered vehicles for us to own that drive themselves.
The idea is to remove ownership, drivership and the internal combustion engine from them and have them arrive on-demand to pick up passengers/freight and depart when unloaded.
The Wall Street Journal estimates for every one of those babies put on the road, eleven conventional vehicles get parked.
Estimates are that 95-97% of the energy spent on a conventional automobile is spent moving the safety cage that protects you from driver error and other people's idiocy.
Remove all the human drivers and that figure can change drastically.
And that change is coming.
Around $10 trillion is at stake when you talk about real estate for parking lots, insurance, hospital bills, autobody repair, pollution, and wages that can all be thrown in flux with this disruption. And that such a huge number that it is inevitable. The Model T was the end of the horse. The Model 3 is the end of the gas pump.
I'm hard-pressed to even list the primary effects of driverless on-demand vehicles, never mind secondary, tertiary, and quaternary effects. You haven't even begun to consider the primary effects -- but one of them is a permanent collapse of demand for oil in the OECD, since 80% of oil demand is presently for transportation fuels, and that just won't be needful anymore.
"In particular, to the extent that self-driving tech allows truck drivers to be replaced, it should lower the cost of shipping goods, which in turn should mean shipping things is more efficient and hence the amount of goods being shipped increases"
I don't think you've thought about it. If you don't need a driver, do you need an 18-wheeler? Why ship 22 pallets on a trailer when you can send 22 driverless vehicles holding a pallet each. The scale of the coming change is going to be titanic.
The change in EV's on the road is non-linear. It is too early to assume an exponential growth, but for sure the thinking that 'past few years we had ~100k/yr EV's, or less than 1% of all cars sold each year', is not so indicative of the future.
This does remind of Nokia vs. Apple just a few years earlier. Now, the car business is generally slower than the phone business, since the product is orders of magnitude more complex, but 10 years is a realistic estimate to see real change. I'm sure even by 2020 no one would argue there will only be ~5% of cars on the road with a plug by 2040.