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Electric Vehicles Will Be A Major Oil Price Driver In The Future

Electric Vehicles Will Be A Major Oil Price Driver In The Future

Oil output (crude plus condensate or C+C) is likely to peak by 2020 (or may have peaked already in 2015 or 2016). Electric Vehicles (EVs) and Plugin hybrid electric vehicles (PHEVs) may allow about 40 percent of current oil consumption to be substituted with electricity, under the simplifying assumption that the use of oil based fuels in PHEVs is minimal due to high oil prices. It is assumed here that high oil prices are the likely result of the decline in oil output. I have modified my medium oil scenario with slightly higher extraction rates, shown in the chart below.

(Click to enlarge)

An important question is how quickly Plug-in vehicle sales can be ramped up. Data from Inside EVs for Worldwide plug in vehicle sales from 2014 to 2016 shows an average growth rate of 44 percent per year in annual sales. I create two scenarios one based on sales growth of personal computers (PC) from 1980 to 2009 (low scenario) and sales growth of smart phones (SP) from 2001 to 2015 (high scenario), my expectation is that a realistic scenario would be between these two scenarios.

PC sales grew at 27 percent/year from 1980-1989, 23 percent/year from 1990-1999, and 12 percent/year from 2000-2009. SP sales grew at 67 percent/year from 2001-2007 and 36 percent/year from 2008-2015. The high scenario growth rates are lower than the smart phone growth rates at 47 percent/year for 7 years and 20 percent for 8 years and falls to 3.2 percent per year until most internal combustion engine vehicles (ICEV) are replaced. The low scenario is nearly identical to the PC sales growth rates from 1980-2009, with the final decade being slightly lower (11 percent).

In this analysis, I ignore fuel used by commercial vehicles (trucks and buses), ships, and aircraft. In the U.S., about 55 barrels of gasoline are produced for every 100 barrels of C+C input into refineries, I have assumed for the World about 40 percent of C+C output is consumed by personal vehicle transportation. The share is lower in the developing World relative to the OECD, but I do not have good data so 40 percent is a rough estimate.

The growth in commercial vehicle fuel use will slow as rail is used more for transport and as oil becomes scarce some rail will be electrified, also the truck fleet will become more efficient as oil prices increase and trucks can slow down to save fuel as oil prices rise. In 2025 (high scenario) to 2035 (low scenario) less fuel will be needed for personal transportation and there may be adequate fuel for commercial vehicles, though cheaper batteries and higher rail use may lead to very low demand for oil as trucks may be mostly used for the last few miles from the rail terminal and batteries might suffice for that use. Related: Keystone XL Needs Much Higher Oil Prices To Be Viable

Oil prices can only fall so far before supply is affected by lack of profits. At some point after 2040 oil supply may be limited by oil demand. Note that both commercial vehicles and personal vehicles may double in number by 2035 (assuming no major recession or depression), if commercial vehicles used roughly the same amount of fuel as personal vehicles worldwide in 2016, a rapid increase in efficiency will be needed in the commercial transport sector as oil output declines, especially from 2020 to 2035 (or 2025 in the optimistic case).

(Click to enlarge)

2006-2014 average growth rate in number of registered personal vehicles was 3.6 percent/year.

Low Scenario

(Click to enlarge)

The 3.6 percent growth rate continues until 2020 and then decreases by 0.1 percent each year until 2048 when the growth rate has fallen to 1 percent per year and it remains 1 percent until 2060. Slower population growth, development of autonomous vehicles, more densely populated cities, and higher oil prices is assumed to lead to slower growth in the personal vehicle fleet over time.

(Click to enlarge)

I have assumed for simplicity that after 16 years a vehicle is scrapped so that from 2016 to 2032 the registered plugin vehicles are equal to cumulative sales and for every year from 2033-2060 the cumulative sales from 16 years earlier is deducted from current cumulative sales to arrive at registered plugin vehicles.

(Click to enlarge)

I assume no fuel use by PHEVs as a simplification, as oil prices rise I expect the share of PHEVs will fall relative to EVs and this assumption may become more accurate. The MPG (miles per gallon) of the ICE vehicle fleet (in U.S. gallons) can be calculated using the assumption above and assuming the average personal vehicle travels 12,000 miles per year and 40 percent of total C+C output is the number of barrels of fuel used by personal vehicles. There are 42 U.S. gallons per barrel.

(Click to enlarge) Related: Crack Spreads Tell Where The Value Lies In Downstream Stocks

Note that I have assumed no changes in behavior as far as combining trips, slowing down, carpooling, less driving, or increased use of public transportation. All of these changes in behavior in response to high oil prices are likely as oil output declines and would reduce the miles travelled per vehicle and reduce the overall average MPG. Note that a Toyota Camry hybrid averages about 40 MPG and 50 MPG is a fairly common average fuel efficiency in a Toyota Prius (non-plugin).

High Scenario

(Click to enlarge)

Note that although MPG levels off in this scenario earlier than the low scenario, this is simply because I assume the share of oil used by personal vehicles is fixed. In reality, oil is likely to remain scarce due to the growth of commercial land transport as well as shipping by sea, and growth in air travel and shipping. Thus, the MPG chart from the “low scenario” is likely to be more realistic than the MPG shown above from the high scenario.

The reality is likely to fall somewhere between these two scenarios in my view. If we are closer to the low plug-in vehicle (EVs and PHEVs) growth scenario, then constrained oil supply may lead to severe disruption as oil prices spike due to competition between various uses for oil (personal transport, trucking, rail, sea shipping, and airline travel and transport) and a depression is likely between 2025 and 2035. If the higher scenario is closer to reality the chances are better that a severe recession might be avoided.

Dennis Coyne via Peakoilbarrel.com

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  • Dan on February 07 2017 said:
    GM released news it's pick up trucks and Cadillac SUV sales are causing it to raise forecasts. Reality vs anti oil price dreams.
  • Steve Marquis on February 07 2017 said:
    Forgive me if I missed it but have you missed the Nikola semi-truck? A very capable long range and powerful truck. I suspect electric commercial vehicles will soon start breaking through.
  • steve rubin on February 07 2017 said:
    You present a well prepared past-is-prologue analysis. However, I think your analogy to pc acceptance and smartphone acceptance is off the mark. We live in a business plan world now; one in which if the business plan works, people buy the product or use the service. People are getting used to adopting disruptive technologies.

    Replacement of the current model of personally owned ICE vehicles and the current model of human controlled commercial transport will be more like the replacement of dumb cell phones with smart phones, not the commercial uptake of smartphones. The IPhone came out in 2007. The Android phones followed around 2010. I think in 2008 the vast majority of cell phones were dumb and by 2013 the vast majority were smartphones. I''m pulling these numbers and dates out of my butt, but my point is that supplanting of technology happens a lot faster than evolution of behavior and technology. This supplanting happened more because of convenience and price, than because of gradual behavioral change.

    This is getting longer than I wanted, but here's the bottom line. My neighbors are already getting rid of their second and third cars in favor of $2/mile Uber. They don't like carrying $1000 worth of insurance , $5000 worth of depreciation, $2000 for repairs and $500 for licensing and registration a year for an unused hunk of steel. That's a couple of 2$/mile uber rides a day per car.

    The convenience and cost of $.25/mile autonomous ride hailing in a $7000 electric vehicle with a $1000 80 mile battery for the 80% of the population in urban and suburban areas will doom the personally owned ICE by 2025. $.25/mile will be possible in a lightweight vehicle with a $1000 15kwh battery that'll pick you up anywhere you are in three minutes and take you 70 miles and then return itself to a charging station. Who cares that it takes a couple of hours to charge, nobody's sitting inside waiting--doesn't change the convenience/price equation much. Forget the 17 year vehicle replacement cycle...heck I'll give you my two ton pile of steel if you'll take it rather than me having to park it, repair it, inspect it, register it, worry about it being stolen, or worry about having an accident that's my fault.

    On the commercial side, truck drivers are just too darned expensive. The technology is here for autonomous trucking and commercial transport is even more driven by price and convenience than personal transport. Economics and competition will take care of that supplanting.

    The numbers we need to watch for guesstimating crude demand are ride-hailing vehicle miles and autonomous transport miles, not the number of personal ev's sold. By 2020 these numbers will be substantial and growth from 2020 to 2025 will be exponential. It's not ridiculous that half of total vehicle miles will be a combination of electric and/or autonomous by 2025.
  • JHM on February 07 2017 said:
    You might look more into commercial vehicles. The electrification of certain commercial vehicles could happen much quicker than for private autos. For example, eBuses in China are now about 20% of the new bus market. Two years ago it was just 2%, and three years before that 0.2%. So China is on track to have 90% electric penetration of the domestic bus market by 2020. Moreover, they are eager to export and build eBuses outside of China.

    A recent study of eBuses used in California found that they were four times as energy efficient as CNG buses. Moreover, I calculate that if you generate power in a CC natural gas power plant, you use 45% less NG per mile than putting the NG directly into a CNG bus. Thus, no matter the price of natural gas, an eBus will cost less to power than CNG bus.

    This kind of niche economics will propel big electrics to dominate many commercial segments very fast. The analyst will want to focus on understanding where the very best use cases exist. This gives electrification a lot of low hanging fruit. The more difficult use cases like an ocean liner can wait much longer and is not really relevant to question of when demand will begin to fall. Rather if some 20% of the commercial market is low hanging fruit for electrification, then oil could lose half of that demand in the span of five years. And that would be plenty fast to put oil into crisis.

    Additionally you may want to give some thought to fuel switching in PHEVs. Depending on the price of electricity, there is a parity price for motor fuel. As the price of fuel rise above that parity price, owners are increasingly motivated to maximize charging so as to minimize fuel consumption. This implies that PHEV owner will have much greater demand elasticity than most fuel consumers. With increasing demand elasticity, it will become much harder for the oil market to sustain higher prices of oil. Thus, the upside potential on oil will be diminished, which in turn could reduce investment in maintaining the oil supply.

    In any long-term scenario, the ability of the oil industry to attract capital is a critical. Without investment the supply dries up. Conventional industry thinking is that a decline in supply would just lead to a high oil price which would draw capital back into the game. However, when there are more and better alternatives to an ICE vehicle, this argument breaks down rapidly. A high oil price may just as well motivate both consumers and investors to put their money into electric vehicles rather than into maintaining the oil supply. So high oil prices become short lived and the adoption of EVs accelerates faster than once thought possible. Capital will flee from oilfield and flow into battery factories and their supply chain.
  • Independence01776 on February 07 2017 said:
    JHM, well said. If replacement solutions offer better returns investment will quickly flow out of ICE vehicles and also they fuel that supports them, oil. The lack of investment would drive up prices, but only if the demand drop is not as fast as the supply drop. A well already drilled and pumping oil does so for many years typically, so it would be a few years before significant declines in oil production would occur.

    I would add that building pipelines for oil fields that on average are much more costly per barrel than the oil coming out of the ground in the middle east is akin to building a road to nowhere should your scenario play out.

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