Motor industry: Pressure on the pump
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Rarely a day passes without at least one mention of a product that was not even easy to buy in its current form seven years ago: the electric car. But behind the headlines about new electric models from the world’s largest carmakers, the spread of charging stations and Tesla’s car battery “gigafactory” in Nevada, a more profound question emerges. Could electric cars ever cut the world’s thirst for oil enough to depress crude prices significantly?
Even the most ardent environmental campaigner might have hesitated to entertain such a prospect in 2009, when International Energy Agency data showed there were fewer than 6,000 electric cars on the road across 40 countries.
But that figure shot up to 1.2m last year, capturing interest well beyond the green movement. “Everybody is paying attention,” says Michael Wojciechowski, a Houston-based oil analyst at the energy consultancy Wood Mackenzie. “This thing has the potential to really start to take off.”
One energy expert in Houston who believes electric cars will remain a niche industry for a long time says some oil producers, including Saudi Arabia, the world’s largest crude exporter, are nonetheless concerned.
“I think they are scared to death,” says Vikas Dwivedi, global energy strategist at the Macquarie Group. “Electric vehicles are a massive enemy and I think they are worried to the point that this has been one of the motivations, among others, for the Aramco IPO.”
Outwardly, the oil industry is less bothered. Opec, the producers’ cartel, predicted last year that by 2040 only 6 per cent of the world’s passenger cars will be running on non-oil fuels. Just 0.1 per cent of the nearly 1bn passenger cars on the road last year had a plug, according to the IEA.
“Without a technology breakthrough, battery electric vehicles are not expected to gain significant market share in the foreseeable future,” Opec said, citing high purchase prices, driving range limitations and poor battery performance in very high or low temperatures.
Sales last year were less than 1 per cent of the 80m passenger cars and light trucks sold worldwide, according to EV Volumes, a Swedish electric car consultancy.
Engines of demand
The oil industry’s views do not seem outlandish considering the vehicles are so novel there is still some confusion about how they work.
There are two main types of electric car: battery-only ones like Tesla’s models and the Nissan Leaf that have an electric motor but no petrol engine, and plug-in hybrids such as the Mitsubishi Outlander that have a petrol engine and a battery that can be recharged, unlike older hybrid models.
Annual sales of both have increased faster than expected, from 48,000 in 2011 to 550,000 last year, especially the battery-only cars that have been showered with incentives by governments trying to tackle climate change. Sales of the two types should reach 850,000 this year, says EV-Volumes.
The questions are, will the industry keep growing as quickly as it has and, if it does, how long will it take before it starts to make an appreciable dent in oil demand?
Passenger cars use 18m barrels a day of oil products, 18.7 per cent of the 96m barrels consumed daily, according to the IEA.
Crude prices crashed from $115 a barrel in mid-2014 to less than $30 in the early part of this year, when supply exceeded demand at a rate of about 1m b/d, the IEA says.
Some analysts say this shows how vulnerable prices are to a relatively small shift in demand — a change that could become permanent if electric cars can eat into the global car market in big enough numbers.
But it is not quite that simple, says IEA chief economist Laszlo Varro, pointing out oil prices are affected by supply as well as demand. So even if electric car sales keep booming, the industry’s effect on crude prices will struggle to match the impact of the natural depletion of existing oilfields, he says.
Considering demand alone, it would take 50m-100m electric cars to displace 1m barrels a day of oil, he adds, depending on future driving habits, That is a far cry from today’s fleet of 1.2m plug-in vehicles on the road.
Then there is the question of how long the government subsidies that are powering much of the electric car market will last. Last year, electric cars had more than 1 per cent of the market in six countries, led by Norway with 23 per cent. But the vehicles received an average subsidy of $4,000 to $5,000, says Mr Varro, and that is clearly unsustainable. “You can subsidise 10,000 cars but you cannot subsidise 10m,” he says.
Still, Mr Varro thinks technical advances and consumer excitement about electric cars point to their potential to be highly disruptive for the oil industry.
“Electric cars are roughly where solar power was 10 years ago in terms of their impact on commodity markets,” he says. “Today, solar is a multibillion-dollar business which has a significant impact.”
The solar industry’s breakthrough followed dramatic falls in the price of photovoltaic panels and some improvements in their efficiency.
One factor holding back electric car sales is the price of the vehicles, which is strongly determined by the batteries that power them. These can account for about one-third of overall costs. Many of the subsidies that bridge part of the pricing gap between conventional and electric vehicles are set to be wound down. China, the world’s largest electric car market, this year confirmed it will decrease the levels of subsidy on offer, removing them by 2020.
“We expect this to pose a significant challenge for the adoption and economics of the EVs on sale, particularly as battery costs remain elevated versus what would be economic at current gasoline prices,” wrote Robin Zhu, an analyst at Bernstein.
Germany’s recent introduction of electric subsidies, worth about €600m, will last until 2019, while the UK’s offer of up to £4,500 towards the upfront cost of an electric car is due to end in 2018.
In the US, some subsidies expire once a certain threshold of sales is cleared. Tesla cars in California come with less of a discount because certain subsidies extend only to the first 100,000 sold in the state.
Electric ambitions: key statistics
Electric cars on the road in 2015, up from 6,000 across 40 countries in 2009
Sales of plug-in vehicles expected this year, up from 48,000 units in 2011
Amount of current oil demand that would be displaced if electric cars reach 35% of global sales, which is predicted by 2040
Opec estimate of passenger cars running on non-oil fuels by 2040
Barrels a day of oil products used in passenger cars, 18.7% of the 96m barrels consumed daily
Subsidies for purchasing electric vehicles are available in most European countries as well as China, the US, Turkey and Canada. In almost all of these, the current schemes will expire within five years. While some could be replaced before they elapse, new governments in those countries may also pull the plug on subsidies, as happened in Denmark last year. Without the subsidies, electric vehicles become less appealing.
In Germany, consumers will pay up to €18,000 more for a plug-in hybrid or electric model than for the equivalent petrol or diesel model, according to figures from EV-Volumes.
Viktor Irle, an analyst at the consultancy, says carmakers are not incentivised to make electric vehicles more affordable “because it will cannibalise sales of the internal combustion engine”.
Nevertheless, all major car manufacturers are developing hybrid or fully electric cars, largely to meet stricter environmental targets around carbon dioxide emissions that come into force towards the end of the decade.
The race to develop an affordable mass-market electric vehicle, able to travel several hundred miles on a single charge, remains tight.
Chevrolet, which is owned by General Motors, this year will begin selling the Bolt, with a range of 200 miles and costing about $30,000 including subsidies, while Volkswagen has said it wants one in four of its cars to be electric by 2025.
The quest for cost parity
Some industry analysts predict that sales of electric cars will soar once the total unsubsidised costs of ownership, including savings on fuel and servicing, equal those of a traditional combustion-engine model.
Salim Morsy, an analyst at the research group Bloomberg New Energy Finance, believes that the unsubsidised total cost of owning a battery-only car will fall below that of conventional cars as soon as 2022, assuming that oil prices are between $50 and $70 a barrel.
By 2030, he believes that the average cost of lithium-ion battery cells and packs may have fallen to less than $120 per kilowatt hour from as much as $350/kWh recorded last year.
So by 2040, he predicts 35 per cent of new car sales globally and 25 per cent of the world’s car fleet will be electric cars, displacing 13m b/d of oil, or nearly 14 per cent of current demand.
“A lot of people think that’s actually very conservative,” he says.
Indeed, analysts at UBS expect electric car cost parity to be reached by 2021 in Europe and by 2025 in China, which is already a powerful force in the market.
In the US, however, where fuel costs are substantially lower, they say “battery electric vehicles will not beat internal combustion engine cars for the foreseeable future”.
Much may depend on whether conventional carmakers follow the path of Tesla and start making their own batteries. Elon Musk, Tesla’s chief executive, says his gigafactory venture — which involves Japan’s Panasonic — should drive battery costs down sharply.
Most carmakers currently source their batteries from suppliers such as Samsung and LG Chem, both of South Korea, and Panasonic.
Volkswagen says it wants to develop a “new competency” in batteries, which has fuelled speculation that it may announce its own version of Tesla’s gigafactory. But the chances of other carmakers moving into production are low, says Philippe Houchois, an analyst at Jefferies.
“The low current levels of profitability in battery cell manufacturing and the need to get prices down by around 40 per cent in the next five years is hardly supportive of investment,” he adds.
This may suggest the oil industry’s complacency about the impact of electric cars today is warranted. But as coal and gas electricity companies have learnt from the growth in solar power, disruption in the energy sector can take effect much faster than expected.
Global shortage of batteries presents dilemma
A global shortage of batteries — and factories to make them — threatens to keep the price of electric cars high for the time being.
Battery costs need to fall significantly before electric cars will be cheap enough to convince consumers to ditch petrol. But carmakers are reluctant to build their own batteries.
Except Tesla, which is building its own gigafactory in Nevada, most of the major manufacturers buy batteries from third-party suppliers such as Samsung, Panasonic and LG Chem.
Philippe Houchois, an analyst at Jefferies, predicts a “sharp shortage in battery capacity as the industry accelerates its transition to electric vehicles”. But carmakers are loath to get into the battery business due to high costs of entry, low margins and “limited scope for differentiation” in the resulting performance of the vehicles, he says.
David Lesne, an analyst at UBS, says it is unclear whether making batteries “is the best use of capital for the carmakers at the moment”.
Excluding Tesla’s $5bn Nevada plant, global battery manufacturing is based almost exclusively in Asia, with the majority of production in China. This leaves Europe with no major production, which is “at odds with commitments to renewable energy”, according to Mr Houchois.
Carmakers in Europe may therefore combine forces to build batteries, he predicts. “Battery capacity may become a political issue in Europe given carmakers’ need to integrate vertically for security of supply and the near total absence of manufacturing capacity in the region,” says Mr Houchois.
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