Across the globe, governments are looking ahead toward a future without the internal combustion engine. The UK, France, India, and Norway have all set dates by which they expect every car sold to be electric. Germany and China have indicated that target dates are being calculated. Paris recently announced a ban of its own (by 2030), while Austria, Denmark, Ireland, Japan, the Netherlands, Portugal, Korea, and Spain have set official targets for electric car sales. The US doesn't have a federal policy, but at least eight states have now set their goals.
If we take these mandates at face value, it might seem that the end of the oil industry is near, with oil rigs and refineries being scrapped, gas stations shutting down, and an all-electric, all-renewable future arriving sooner rather than later. It is self-evident that some version of this future will come to pass eventually. Fossil fuels are, by definition, finite. At some point they will be exhausted, become too expensive to use, or will be made obsolete by new technology. But even if electric vehicles (EVs) reach cost and performance parity with conventional combustion engines in the not too distant future, there still remain a lot of unanswered questions about how long it will take for consumers to get comfortable that parity is real, and for manufacturers to turn over enough volume to make a big enough impact on the oil industry.
Governments around the world have outlined their plans to transition out hydrocarbons, but their capacity to implement those plans is not limitless. Government taxes and subsidies do have an impact, but they can’t compel car producers to sell something, nor can they persuade consumers to buy something. In practice, the transition will happen one car sale at a time, led by what consumers want and what industry can produce profitably.
The economics of EVs, mass transit, shipping, and trucking are well-established. It all boils down to vehicle cost, battery capacity, and battery charging time. Right now, the range of a state-of-the-art electric car is a little over 310 miles, which is competitive with a conventional car with a 15-gallon gas tank that will go to around 370 miles—and it takes little over 30 minutes to charge a typical electric car. As explored in Benoit Laclau’s recent blog, rough parity in terms of performance and price is within reach and we should know fairly soon when EVs will be able to compete in the marketplace.
So, what share of the market will EVs take, and what does that mean for the oil and gas sector? Market penetration for any new technology is difficult to predict. Even when a new product is demonstrably better, perception is reality and instinctively consumers often see something new as risky. The transition from steam to electricity in industrial processes is a case in point. By 1881, Thomas Edison had built his first power stations and was lighting up the cities of New York and London. Electric motors were developed and poised to displace their clumsy, noisy, and inherently unsafe steam counterparts. Yet by 1900, only 5% of industry had been electrified. Why? Because there’s more to adopting a new technology than buying a gadget and installing it. In the case of electric motors, and EVs, the new technology will require changes in usage habits, maintenance patterns, and infrastructure. Those changes could well be discomforting and increase, at least to the buyer, the cost and risk of adoption.
Energy-efficient appliances provide another example of market penetration lagging the economics of a new technology. In terms of upfront investment and energy-savings, it almost always makes sense to buy the more efficient refrigerator, air conditioner, or light bulb, or to better insulate a home. The same applies to automobiles. The technology exists to produce cars with better mileage at a cost that offers a quick return on the investment. Yet, history has shown that consumers can remain wedded to less-efficient alternatives which remain more competitive (or even dominant) in the marketplace for some time. The rationale can be frustrating, but easy to understand. Consumers don’t always have complete or reliable information about the potential return, they aren’t able to process the payback arithmetic or they don’t have access to credit to finance the upfront cost of efficiency.
Inertia may well have a similar effect on EV adoption and the transition could take longer than anyone expects, even when the economics and performance turn favorable.
"Inertia may well have an ... effect on EV adoption and the transition could take longer than anyone expects, even when the economics and performance turn favorable."
Oil demand is dominated by road transportation and the arithmetic is relentless. It grows with population and the economy. For the last couple of years that’s amounted to an increase of around 1.2 million B/D each year. Based on the current trajectory, we can estimate that there is likely to be an additional one billion cars on the road globally by 2022 and, business as usual, that would amount to an additional 34 million B/D in oil demand.
Up until now, efficiency has kept oil demand from growing exponentially, which has improved consistently since the late 1970s. Now, we’re adding the effects of EVs. At EY, we’ve done some analysis of the puts and takes over the next 25 years; even if we were to make very ambitious assumptions about EV penetration (e.g., predictions that half of the cars sold will be EVs within 10 years), oil demand might peak but it would never fall below 80 million B/D or by more than 1 million B/D in any given year. Even if we take into account that the industry has to replace around 5 million B/D each year due to well decline, companies still have to drill and complete a lot of wells.
Although there are a lot of questions, some things are clear. First, Big Oil is going to be big for the foreseeable future. Second, the range of portfolio options for all companies (including oil companies) will expand as consumers’ transportation options expand, together with the infrastructure necessary to support those options; as always, figuring out where the returns are, where the risks are and how they fit together with a company’s core competencies will be challenging. Third, providing transportation to consumers who have more choices will be more competitive, and with competition comes increased pressure to make oil cheaper. Digitization in the oil field and refinery is a powerful response to that pressure. Ultimately, there’s a lot of value to be created, and competition helps.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
Paul Bogenrieder is responsible for leading the Oil and Gas analyst team in EY’s Knowledge Group. In that role he informs, coordinates, and articulates the firm’s point of view on the oil and gas industry, including industry profitability and capital spending, the value proposition for various industry initiatives (including digital solutions), and the future of the energy mix. He also manages quality assurance, resource deployment, and career development for the team. He has had forecasting, risk management, and market research roles in utilities, merchant power companies, and oilfield services companies. His areas of expertise include drilling economics, energy marketing and trading, and inter-fuel competition.