Electric car sales are starting to get traction. Analytically, the numbers are showing growth. But you don’t need a spreadsheet to see the trend. Cars built by Tesla, BMW and others are turning heads at street corners – and turning investor sentiment too.
So, Arthur’s question was unsurprising. And it was the same question that is simmering on the frontal lobes of many energy investors I know: “These things are going to clobber oil prices aren’t they?”
I paused before answering Arthur on the speaker phone, because I’m always cautious about tackling this question. Electric vehicles have had many failed attempts at trying to break into the monolith of petroleum powered transportation. The hype-and-failure cycle has come and gone at least three times in my 30-year career.
“Maybe they will,” I replied hedging my answer, “it’s hard to argue against the simple logic that’s charging up the headlines: Electric Cars Will Take Market Share from their Gas Guzzling Peers, Reduce Petroleum Demand, and Will Therefore Zap the Price of a Barrel Forever.”
“That’s the thesis,” agreed Arthur, “and I’m beginning to believe it’s possible.”
I took a sip of coffee, my necessary precursor to offering a contrarian view.
“Actually Arthur, I have long been a big believer in EVs,” I said, “significant adoption is inevitable, but here’s the irony: A ramping up of electric car sales – and electric car hype – is likely to drive the price of oil up, not down.”
Now it was Arthur’s turn to offer a pregnant pause. I could sense behind the speaker he was wondering how substituting gasoline with electrons could create an oil shortage.
“It’s a matter of timing and scale,” I explained, “or more to the point, mis-timing and lack of scale.”
Our conversation went on to discuss the gist of the looming problem. The appetite of oil companies to spend billions on big, long-term projects is already diminishing – diminishing faster than what is likely to be the growth in demand-side substitutes. In other words, the timing is off: investment into upstream oil capacity – things like big offshore platforms – over the next 10 years is likely to decline faster than electric vehicles can grow.
“Your phone call is symptomatic of broader sentiment.” I said. “Unease surrounding the first credible threat to oil in 100 years is altering perceptions of risk and return. Shareholders like you, boards-of-directors and CEOs are already questioning whether to expose billions of dollars to big, multi-decade megaprojects with today’s low prices. The increasing threat of gradual obsolescence will only serve to amplify perceptions of higher risk and lower return – which will hose down still-needed investment into future oil reserves.”
“So what you’re saying is that divestment out of long-term big oil projects has already started,” mused Arthur.
“Yes,” I affirmed, “and in my mind it’s happening faster than people realize; the potential scale and timing of oil divestment is not looking balanced against the scale and timing of people swapping out their gasoline-powered SUVs.”
I gave Arthur my prediction. Over the next few years the headlines will legitimately boast impressive growth rates of EV sales – there are a lot of views out there, but we’ll probably hit a million-a-year globally by 2020, maybe more. Analysts will get overzealous about exponential adoption forecasts as automakers roll out more models. The psychology will rub off on decision makers; oil companies, beholden to their shareholders will be increasingly reluctant to making investments into long-cycle mega-projects. The faster EV sales grow, the greater the perceived risk to big oil projects, the slower the pace of investment. So, the backbone of global oil supply is likely to contract in capacity – massive delays and cancellations are already seeding this trend.
Meanwhile even the most sophisticated math won’t overcome the staggering scale of our oil addiction. A million electric vehicles sales in a year might be enough to displace 50,000 barrels per day, but that’s de minimis compared to the 100-million-barrels-a-day that the world will be guzzling by the end of the decade.
Wrapping up the call, I expressed a related concern, “Arthur, what worries me is the polarized psychology that’s taking root. The emerging mainstream view is that substitutes to oil transportation are quickly forthcoming. Yet mainstream behaviour is still anchored in buying bigger petroleum-powered vehicles.”
“So there is more emphasis on divesting oil supply than on divesting oil demand,” pointed out Arthur. “I agree that suggests higher oil prices.”
“Maybe,” I said again hedging my response, “and we will certainly have a more exciting conversation about the potential of electric vehicles the next time we have higher oil prices.”