Wednesday, January 17, 2018

Electric Vehicles Are Coming, So Why Do We Need to Drill for More Oil?

The Trump administration has been supportive of further extraction of fossil fuels from the earth.  It recently announced that it would encourage exploration for oil off most of the US coastline, although Florida was provided an exception for suspiciously political reasons.  Does any of this make sense?  Ignore for the moment the climatological folly of burning the existing petroleum reserves.  Will there even be a market for all those new barrels of oil that might become available in ten years or so?  Conflated with news of oil exploration efforts are statements by both nations and automobile manufacturers that they are moving towards a not-too-distant future when gasoline burning vehicles will be the exception rather than the rule.  Several countries have announced an all-electric-vehicle future.  Does this suggest we could reach a peak in oil demand before long?

The Economist featured as the lead article a eulogy for the internal combustion engine, The death of the internal combustion engine, which featured this lede.

“It had a good run. But the end is in sight for the machine that changed the world.”

There are several evolving situations that bode ill for the currently constituted market for automobiles.  The first is the rise of hybrid and all-electric vehicles as viable alternatives to gasoline burners in terms of both cost and convenience.  Electric autos have been more expensive than the traditional competitors because of the cost of the batteries needed to provide sufficient range to be of interest.  And this has been so even though manufacturers have been selling their products at a loss in order to generate some market share.  That will soon no longer be the case.

“UBS, a bank, reckons the ‘total cost of ownership’ of an electric car will reach parity with a petrol one next year—albeit at a loss to its manufacturer. It optimistically predicts electric vehicles will make up 14% of global car sales by 2025, up from 1% today. Others have more modest forecasts, but are hurriedly revising them upwards as batteries get cheaper and better—the cost per kilowatt-hour has fallen from $1,000 in 2010 to $130-200 today.”

This projects more battery power in less volume and at lower cost.  Everyone is betting that battery technology will continue to improve in the coming years and the relative cost of electric vehicles will continue to fall.

Thus far, the public—at least in the United States—has been tepid in its enthusiasm for these models.  Even though the price has fallen, the infrastructure to support battery recharge is just nowhere near adequate.  However, auto producers find themselves in a bind and feel they must bet on improved infrastructure and a more enthused consumer base.  Pressure is coming from politicians to address climate change and pollution issues, and from the evolving market for automobiles.

“Charging car batteries from central power stations is more efficient than burning fuel in separate engines. Existing electric cars reduce carbon emissions by 54% compared with petrol-powered ones, according to America’s National Resources Defence Council. That figure will rise as electric cars become more efficient and grid-generation becomes greener. Local air pollution will fall, too. The World Health Organisation says that it is the single largest environmental health risk, with outdoor air pollution contributing to 3.7m deaths a year. One study found that car emissions kill 53,000 Americans each year, against 34,000 who die in traffic accidents.”

Tesla has provided a chilling example of how much easier it is to become a mass market competitor when producing electric vehicles rather than the more capital- and labor-intensive gasoline burners.

“But electrification has thrown the car industry into turmoil. Its best brands are founded on their engineering heritage—especially in Germany. Compared with existing vehicles, electric cars are much simpler and have fewer parts; they are more like computers on wheels. That means they need fewer people to assemble them and fewer subsidiary systems from specialist suppliers. Carworkers at factories that do not make electric cars are worried that they could be for the chop. With less to go wrong, the market for maintenance and spare parts will shrink. While today’s carmakers grapple with their costly legacy of old factories and swollen workforces, new entrants will be unencumbered. Premium brands may be able to stand out through styling and handling, but low-margin, mass-market carmakers will have to compete chiefly on cost.”

Changing technologies and evolving consumer attitudes towards owning automobiles suggest declining demand in the future.  Younger people seem to have far less interest in automobiles than their parents.  Ride-hailing services like Uber and Lyft have made getting from point A to point B much simpler than driving one’s own auto, and much cheaper than buying something that will spend most of its lifetime parked somewhere.  It is now expected that self-driving cars will also become a market factor in providing an alternative service that will limit personally owned vehicles.

“Assuming, of course, that people want to own cars at all. Electric propulsion, along with ride-hailing and self-driving technology, could mean that ownership is largely replaced by ‘transport as a service’, in which fleets of cars offer rides on demand. On the most extreme estimates, that could shrink the industry by as much as 90%.”

Car makers are being forced to invest in a future in which outcomes are highly unpredictable.  Paul Lienert penned an article for Reuters: Global carmakers to invest at least $90 billion in electric vehicles

Allana Petroff provided a summary of actions being taken by nations to force the switch to electric vehicles in These countries want to ditch gas and diesel cars

As of July, 2017, India (2030?), France (2040), Britain (2040), and Norway (2025) have expressed the intention to ban sales of new gas and diesel cars.  India’s target of 2030 is described as “aspirational”, but the others seem quite serious.  The British want all cars on the road in 2050 to be emissions free.  Norway plans on using incentives to facilitate the switch.  New cars have a tax of about 100% imposed on them.  That tax is waived for electric vehicles.  Electric vehicles and hybrids were already about 30% of all new cars purchased in Norway last year.

“Austria, China, Denmark, Germany, Ireland, Japan, the Netherlands, Portugal, Korea and Spain have set official targets for electric car sales.”

“China -- which buys more cars than any other country -- is also the largest electric car market. China accounts for more than 40% of the electric cars sold in the world and more than double the number sold in the U.S., according to the IEA.”

China has dreadful pollution problems and cannot stand a future in which every Chinese family is tooling around in a gas guzzler.  It would not be surprising for them to make a big move in the electric vehicle market.

But does all this mean that the demand for petroleum is going to decrease?  Light and heavy trucks are also a significant factor in petroleum demand.  It is not clear yet when or if those products will be electrified.  Air travel provides an even farther reach.  And petroleum byproducts provide a significant level of demand as well.  A McKinsey study provides some insight: Is peak oil demand in sight?

“The total demand for liquid hydrocarbons will play out as a tug of war between growth in the petrochemical sector and declining demand from passenger cars. Petrochemical feedstock will drive 70 percent of the growth in demand for liquid hydrocarbons through 2035. Demand for liquids, excluding chemicals, will peak and flatten by 2025 because of a decline in demand from light vehicles. The petrochemicals demand will drive the growth of light end products, a large share of which are not made from crude oil.”

Demand for petrochemicals is decreasing in many of the advanced countries, meaning any growth in demand will come from the developing nations.  The level of that growth will depend on overall economic growth, responses to pollution, and the penetration of recycling technologies and recycling legislation.  The demand for gasoline depends on how one views the growth in the number of electric vehicles.  McKinsey leans towards a future in which lower GDP growth is expected and a more rapid growth in the sales of electric vehicles is predicted.

“ McKinsey’s latest automotive consensus suggests that by 2030, electric vehicles (including hybrids and battery-powered plug-in vehicles) could represent close to 50 percent of new cars sold in China, the European Union, and the United States, and about 30 percent globally. Also, for the first time, our business-as-usual case includes autonomous-vehicle adoption and car sharing. If the market penetration of electric, autonomous, and shared vehicles accelerates, oil demand driven by light vehicles could be approximately 3 million barrels lower in 2035 than assumed in the business-as-usual case. Together, this accelerated adoption of light-vehicle technologies and the adjustment of plastics demand could reduce 2035 oil demand by nearly 6 million barrels per day. An important result is that oil demand will peak around 2030, at fewer than 100 million barrels per day in this scenario.”

So, there is at least one credible prediction that petroleum demand could peak as soon as 2030.  If this conclusion gains credibility, will oil companies be willing to invest in ever-harder to extract oil sources?  Will those with significant, easy-to-access sources begin to flood the market to extract as much income as possible from their reserves before falling demand drives prices lower?  Will consumers learn to love electric vehicles and be followed by trucking companies in electrifying their fleets?

Stay tuned.  The next few decades could be quite interesting, but not necessarily pleasant for all.

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