Electric Cars Impact on Oil?

The electrification of powertrains continues as automakers roll out everything from subcompact compliance cars to electrified supercars to improve efficiency and optimize power. Tesla’s Model 3 is just the prong on the charge cord of available plug-in vehicles. BMW, Mercedes-Benz, Ford, Volkswagen, Volvo, and Hyundai have all announced electrification plans for dozens of vehicles by 2020. Plug-in sales have grown 32 percent annually since 2013 (41 percent globally), and most autonomous vehicle plans are based on electric cars. General Motors plans 20 electric vehicles in the near future and plans to scrap internal combustion engines entirely as soon as 2030.1

Worldwide, the global electric car stock surpassed 2 million vehicles in 2016 after crossing the 1 million threshold in 2015.2

Not so long ago, minuscule sales of EVs made it hard for big oil to take the threat of electric cars seriously. Now, thanks to growing demand in Asia and Europe, the question facing experts is no longer whether EVs will take over, but when?

Economic Comparison

Economics are driving the change to electric. Now that prices for electrics are coming into line with gasoline-powered vehicles, operating cost differentials favor electrics. Take for an example a hypothetical gasoline powered car with 20 miles per gallon efficiency. With gasoline at $2.50 per gallon, it would cost $12,500 for gasoline fuel to drive 100,000 miles. For electrics, the “energy consumption rate” is expressed as “kWh per 100 miles (kWh/100m)”. This figure is listed on the EPA’s EV fuel economy label and the US federal government’s fueleconomy.gov Web site. Although retail residential electric rates vary, 12.5 cents per KWH is a about the US’ average. At a rate of 35 kWh/100m for some Tesla models, this equates to $4,375 for the electric car to travel the same 100,000 miles. This equates to a 65% savings. Of course, range restrictions and access to charging are still constraints for electric vehicle operations.

Potential Impact on Future Oil Demand

Bloomberg’s New Energy (“NEF”) expects electric cars to outsell gasoline and diesel models by 2040, reflecting a rapid decline in the cost of lithium-ion battery units that store power for the vehicles. It expects 530 million plug-in cars on the road by 2040, a third of the worldwide total number of cars.3

A Barclays’ analysis concluded that oil demand could be slashed by 3.5 million barrels per day worldwide in 2025. If electric vehicle penetration reaches 33 percent, oil demand could shrink by a whopping 9 million barrels per day by 2040, Barclays concluded.4 Bloomberg’s New Energy Finance puts the number at 8 million barrels by 2040, more than the “current combined production of Iran and Iraq,” they note.

Crude Oil Outlook

While futures markets aren’t a crystal ball, their price levels and related options are useful for estimating future ranges, or “confidence intervals,” for crude oil and natural gas prices.

The graphic below shows crude oil price as of October 16, 2017 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).

On the graphic below, the blue lines are within one standard deviation (σ) of the settlement price (green line) and the red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).

Based on October 16, 2017, pricing, the futures markets indicate that in mid-December 2017 the expected price is $52.37 with a 68% chance that oil prices will be between $46.50 and $58.00 per barrel. Likewise, there is about a 95% chance that prices will be between $40.00 and $65.00. For a longer-term view, by mid-March 2018 the +/- one standard deviation price range is between $44.00 to $63.00 per barrel with an expected value of $52.61.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $2.94 per MMBtu on the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in December 2017, the expected price is $3.21 with a +/- 1σ price range of $2.75 to $3.95 per MMBtu, and the 2σ range (95%) of $2.25 to $4.95 per MMBtu. For a longer-term view, by mid-February 2018 the expected price is $3.23 per MMBtu with a +/- one standard deviation price range is between $2.55 to $4.65 per MMBtu.

1. Chicago Tribune, “The rise of electric vehicles and the fall of gas engines is a matter of when, not if”, October 15, 2017, http://www.chicagotribune.com/classified/automotive/fuelefficient/sc-auto-cover-electric-vehicles-combustion-engines-20171018-story.html

2. Global EV Outlook 2017, International Energy Agency, https://www.iea.org/publications/freepublications/publication/GlobalEVOutlook2017.pdf

3. Bloomberg New Energy Finance, Electric Vehicle Outlook 2017, https://about.bnef.com/electric-vehicle-outlook/

4. Barron’s, Oct. 5, 2017, http://www.barrons.com/articles/death-of-the-internal-combustion-engine-oil-implications-1507212733

Tags: Oil & Gas Price Outlook October 2017, Gas Price Outlook October 2017, Oil Price Outlook October 2017

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