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2017-04-03

Is Crude Oil Threatened By The Rise Of Electric Cars?



Pacific Northwest Laboratory estimates that by 2030 the PHEV fleet would count 37m vehicles (Fig. 1) in comparison to our estimate of 28m, respectively. We assume a sales ratio of 1:1.5 between BEV and PHEV models in line with Navigant Research. A higher sales number for PHEV models makes sense. PHEV's can switch to gasoline to extend the range. It is very practical in a large country like the U.S.
Now we should come back to the original question. How much would such a sizable electric fleet impact the gasoline and electricity demand?

  • Electric fleet would save annually some 17.2b gallons of gasoline by 2030. That corresponds to 0.4b barrels and it would be ~13% against the current level of gasoline consumption.
  • Electric fleet would increase the electricity consumption by ~180 TWh. That is equivalent to ~3% of the current annual electricity consumption in the U.S.
Here are the key assumptions for our calculations:
  • Average driving distance is 33 miles per day. This same assumption is used for the electric and internal combustion engine (ICE) cars.
  • We estimated that the ICE cars' fuel efficiency would be 27.4 mpg in 2030 versus the current level of ~24 mpg, respectively. We assumed a fuel efficiency improvement of 13% by 2030. This might sound low. However, the new car models' fuel efficiency has improved only 1.24% annually between 1990 and 2013. The data discussed here is obtained from the United States Department of Transportation (DOT).
  • The electric batteries need to be charged on the electric grid. Pacific Northwest Laboratory data suggests that an electric fleet of 37m consumes 172 TWh. They used a commercial software to simulate the U.S. electric grid. We rounded up their 172 TWh number to 180 TWh to take into account the additional 2m plug-in vehicles in our scenario.
The electric fleet could save annually 17.2b barrels of gasoline in the U.S. by 2030. At the petrol station this would be worth of $39.5b. Not very good news for the oil refiners.

Global Gasoline Demand

The global gasoline demand is expected to decrease by 4% between 2014 and 2035 according to Navigant Research. They expect that the decline in the global gasoline demand would start already in 2021 and continue until 2035.

Hybrid Cars and Fuel Technology Improvements

Besides electric cars such as PHEV's and BEV's there are other aspects that might reduce the gasoline demand in the U.S.:
  • Hybrid cars. Their gasoline consumption is typically much lower in comparison to the ICE cars.
  • ICE cars gasoline consumption is reduced each year due to the technological improvements.
  • Aging population might drive less. The population that is older than 65 will grow by 50% between 2010 and 2030. They would sleep in the mornings instead of driving to work.
These additional factors could potentially reduce the gasoline demand on top of electric cars.

Is There Still Some Oil Left in 2030?

The proven oil reserves have been increasing significantly during the past 20 years. These will be sufficient for several decades to come.


Proven oil reserves

Why Due Diligence Counts in the Energy Sector?

There are many forecasts out there. It shows how difficult it is to forecast the rise of a new emerging technology. Only time will tell if this same would repeat with the rise of electric cars.

Why Might Electric Cars Become Popular Soon?

We believe that the low cost of ownership will be among the key drivers for the quick adoption of electric cars.


Cost of ownership of electric cars

There are several other catalysts for a quick adoption:
  • Reduction in CO2 emissions
  • Lower noise levels in the cities and urban areas
  • New technology offerings might be included in the electric car models. Tesla just introduced a self driving Model S - here is a video.
  • Health care savings tied to a better air quality.
University of California has done some research on the health care savings tied to the better air quality. They found that the U.S. might save cumulatively over $105b by 2030.
They assumed that some 24% of the light duty vehicles would be electric by 2030. We note that some caution is needed with their savings number. It assumed a pollution free energy generation.
Even some highly polluting primary energies like coal are used for the electricity generation in the U.S. For this reason we think that it is more conservative to suggest a saving potential of $50-105b.

Bullish Factors for Oil

After discussing the bearish factors it is time to list a few bullish factors that might support the oil price in the future:
  • Major wars or conflicts in oil producing countries typically send the oil price higher. Iran, Iraq and Kuwait are some examples from the past.
  • Growing middle class population worldwide might still buy traditional ICE cars and drive up the gasoline consumption.
  • Currency exchange rates - if U.S. dollar weakens this could drive the oil price higher.
  • The oil price could rise if the oil producing countries would agree to jointly reduce their supply (OPEC).
We believe that the growing middle class is the major bullish factor for the oil price. The middle class will count additional 3 billion members in the next two decades.
Some manufacturers like Kandi Technologies (NASDAQ:KNDI) focus on the low cost electric vehicles in China. They also offer short duration renting schemes in large cities so the consumers do not need to buy electric cars. We think that this is a good idea.

Oil Price

In light of the fundamentals we believe that the oil price will stay relatively close to its lower trading range shown in Figure 5. We expect that the oil price will stabilize at the range of $40-$60.
Any major conflict or war in an oil producing country could lift the oil price temporarily much higher. Some related tickers would be:
  • United States Oil Fund
  • iPath S&P GSCI Crude Oil Total Return (NYSEARCA:OIL)


WTI spot price

Conclusion

We believe that other asset classes and commodities might be better investments than oil in light of the fundamentals discussed in this article for the next 10-15 years. We recently wrote a bullish article on the agricultural commodities where the fundamentals look much better in our opinion. For the short term we are invested in some promising biotechnology stocks with an upcoming price catalyst in Q1 2016.