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Electric threat

The oil industry needs to start taking the rise of alternative vehicles seriously

Oil and its products have given the world more than a century of easy mobility. Gasoline and diesel keep ambulances running and the plane you take on holiday needs jet fuel. They enable global trade, on land and at sea. More than any other commodity, oil allows for wealth creation. Countries with less crude, and therefore less mobility, are poorer. Oil helps yank people out of poverty.

But its dominant role in global transport—like its function in power generation in previous decades—is coming under threat. It's starting with cars.

As our survey this month suggests, it's time for the oil industry to take electric vehicles (EVs) seriously. They are a big deal—for the oil industry and the global economy. Unless you've avoided Europe, California or Manhattan, or haven't heard about China's and India's plans for battery-powered cars, you can't have missed the rise of the silent, economical EV and its hybrid cousin. No longer is a Prius or Tesla the expensive badge of an eco-warrior with more money than sense. Auto-makers believe EVs are the future and a tsunami of new models—more than 100—is about to hit the market. The question is no longer if the battery will hurt oil demand, but how much.

The short answer is that no one yet knows. The forecasts are almost too diverse to bother with. The International Energy Agency's central case is that EVs will pinch about 1.3m barrels a day from demand by 2040. If so, the oil industry can rest easy—in the same time, consumption will still grow by another 10m b/d or so. Yet, at the other end of the spectrum, Bloomberg New Energy Finance says battery cars will cut 13m b/d from demand by 2040. Oil would go into permanent decline.

What can be said is that EVs and alternative forms of mobility—electric rail, natural gas bunker fuel, car-sharing, hydrogen fuel cells, self-driving vehicles—are on their way. Our survey focuses on EVs, because they are leading the race and promise the biggest impact. Government subsidies have given them a push—helping, for example, EVs to account for about 40% of the new-car sales in oil-rich Norway. Climate policy and fuel-economy rules have also played their part.

Unstoppable progress

But the market is taking over. Battery costs continue to fall steeply each year. New charging-point networks and wired car parks are sprouting across advanced economies. Sceptics in the oil industry might not believe in a grid-powered transport future—but China does. It wants to become the dominant manufacturer of EVs, both for its own fleet and the world's. India, whose economic rise the oil industry assumed would mean soaring petroleum needs, wants all transport to be electrified by 2030.

At a stroke, the ambitions of those two countries—even if they are only half fulfilled—threaten the premise of future oil-demand growth, almost all of which is forecast on expectations of the ever-greater thirst for petroleum in the developing world. If China's manufacturing prowess repeats for EVs what it achieved with solar panels, mobile phones and other new tech-mass output, at a fraction of the cost—EVs may soon enjoy a Model-T Ford moment.

40% - EV share of new-car sales in Norway

The galling thing for the oil industry is that this shift is underway while oil prices are relatively low. The new enthusiasm for EVs is not a response to high-cost fuel and these days it's not about hair-shirt greenery either. Teslas are cool and aspirational; they look like they belong in the 21st Century. Small EVs are more convenient and cheaper to run, especially in cities. In some places, it's cheaper—with the subsidies—to go fully electric. The consumers' verdict will only become truly clear in a few years' time, but the technological alterations underway in cars—and the hints of a fundamental change in consumer choices, at least on the margins—have the ring of a secular shift. That's why auto-makers, which spend a lot more time listening to consumers than oil producers do, are rushing to make new, better, longer-driving and cheaper EVs.

The sceptics may prove right—this isn't the first time the EV crowd have tried to park their battery-powered tanks on the internal-combustion engine's lawn. And even if EVs do make the breakthrough this time, natural gas will surely be a major source of the electricity they need. Integrated majors with gasoline-filling forecourts also own the real estate that could double up as charging points.

But the oil sector needs to accept the threat. Joel Couse, Total's chief energy economist, is a serious thinker about oil and its future. He told a conference recently that EVs would make up 15-30% of new vehicles by 2030. Of the outlooks for EV's that's a conservative one—but even if it bears out, that's just over a decade away. It also follows that if EVs penetrate just a third of the market, they will force conventional engines to compete on cost and fuel economy. The world's cars are going to get a lot less thirsty.

This article is part of a report series on Electric vehicles. Next article: Let a million EVs bloom

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