Will the advent of electric vehicles mean the end of oil? Here our Global Resources team share their assessment of the impact electric vehicles could have on energy markets.
Settling the electric vehicle vs oil debate
The Global Resources team believes that electric vehicles (EVs) will be a growing part of the transportation landscape. At the same time, we believe that crude oil demand will continue to grow for at least the next decade. How can these two propositions be consistent?
In debate, a “straw man” argument occurs when a competitor defeats only a weak version of their opponent’s argument. The opposite is an “iron man” argument, where the competitor defeats the strongest possible version. We have simulated the iron man argument for electric vehicle and oil demand in the chart below. The analysis assumes incredibly fast penetration of electric vehicles with sales increasing by 50% each year until all new sales are electric in 2028. Despite this, oil demand is still projected to grow over the next decade.
In the chart, the stacked areas show a hypothetical scenario for crude oil demand by end use. The bottom area represents Light Vehicles – cars, buses, taxis, light trucks, motorbikes and minivans – which we believe will be most prone to electrification in the foreseeable future. Overlayed on top of this are two red lines plotted against the right hand axis: they show EVs as a percentage of light vehicle sales and EVs as a percentage of the total fleet, respectively. In this iron man scenario EVs are 100% of sales by 2028 but still don’t approach being 100% of the fleet until 2050. Finally, the black line is historical crude oil supply flat lined at August 2017 supply levels for future periods. This highlights the fact that demand will exceed current supply at least through to 2030, implying the oil industry still needs to grow despite the assumption of a rapid electrification of light vehicles.
Hypothetical crude oil sensitivity to electric vehicles
Source: US Commercial Travelers Association, International Energy Association, BNEF, Bloomberg, OITA, IATA, FSI/CFSGAM Analysis
Hence we conclude that both EVs and oil have growth ahead. While this might seem counter-intuitive, there are two fairly simple explanations. First, while new cars may be electric, the existing fleet of cars is still conventional and until those are scrapped, there is significant base demand for oil. Second, while light vehicles represent about 40% of crude oil demand, the remaining 60% is a range of industrial activities alongside aviation, maritime and heavy duty trucks (3+ axles). None of these industries are currently exposed to structural “electrification”.
The road transportation industry is clearly in need of innovation. Road transportation is dangerous, with 3500 road deaths daily. It is pollutive, being responsible for about a quarter of anthropogenic greenhouse gas emissions. And it is hugely inefficient, with car utilisation only around 4% and consuming 600bn passenger hours worldwide each year. It is little wonder that innovators across the globe are trying to find improvements to this trillion dollar industry. We will continue to invest in this transportation revolution. However we are not giving up on oil – the resource that provides about a third of the world’s energy and still has growth ahead.
 UN, http://www.unece.org/?id=9890
This article comes in a series of blogs from our Global Resources team looking at sustainable resources investing. Sign up here to receive these blogs and more from our investment teams.