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Electric vehicles—the great unknown

Forecasters agree that EVs will hurt oil demand—but on the size of the impact consensus is scant

The growing popularity of electric vehicles (EVs) has been one of the major themes of the new century. The global fleet is now greater than 1m units, annual sales are growing by about 50%, and zero-carbon transport will be a trend for the next two decades.

Rapid EV development is a critical part of the decarbonisation goals enshrined in the Paris Agreement. Transport accounts for about a fifth of global emissions, according to World Bank data, and only a wholesale shift to zero-carbon transport would let the world reach its target by the second half of this century.

If so, oil will be a casualty. Transportation fuels account for around two-thirds of every barrel of oil refined. "It is very long term," says Scott Shepard, a senior analyst at Navigant Research, a consultancy specialising in clean energy.

"[The growth of EVs] definitely has an impact on the oil market. "It's going to evolve over time but the net effect of it will be reduced oil consumption."

The data are impressive. By the International Energy Agency's (IEA) reckoning, by the end of 2015, more than 1.3m EVs were on the world's roads. A year earlier, only half that number existed. "In 2005," the IEA noted, "electric cars were still measured in hundreds."

Global passenger-car sales in 2016 amounted to 69m units, according to the International Organization of Motor Vehicle Manufacturers (OICA), giving EVs a global market share of 1.4%. EV share was more than 1% in six European countries and China—and as much as 23% in Norway.

In truth, though, the forecasts vary too widely yet to be reliable. Some rely on the extraordinary recent growth figures; others on the efforts needed to meet the Paris Agreement's goals; and the doubters see overwhelming infrastructural obstacles that will make for modest EV penetration.

The IEA's main scenario expects the global EV fleet to hit 30m by 2025 and more than 150m in 2040—by then removing about 1.3m barrels a day of oil demand. This compares with a total vehicle fleet in 2014 (including internal-combustion engine-Ice-cars) of 1.2bn, according to the OICA.

More ambitious fuel-economy and emissions policies could yield 0.715bn EVs by 2040, the IEA reckons—enough to displace 6m b/d of oil demand. Even so, given the agency's projection for 103.5m b/d of demand by 2040 (compared with 92.5m b/d in 2015), EVs would trim consumption by less than 10%.

Others, including some in the oil industry, aren't so sanguine about the threat. Joel Couse, Total chief energy economist, recently told Bloomberg New Energy Finance's (BNEF) 2017 Summit that EVs would account for 15% and 30% of all new-car sales by 2030, causing global oil demand to "flatten out, maybe even decline".

BNEF is more bullish still, predicting EV sales will reach nearly 41m units, or 35% of all new-vehicle sales, in 2040. By then, they'll account for a quarter of the world's fleet.

Given the eye-watering price of some EVs now, that seems hard to fathom. Yet the Carbon Tracker Initiative—which assesses the impact of new technology and emissions policy on the hydrocarbons sector—thinks that EVs will compete on cost with their diesel and gasoline rivals by 2020. In the decade after, it says, EVs will grab a fifth of the market.

"To put this in perspective, BP's 2017 energy outlook sees EVs only commanding a 6% share (100m vehicles) of the market five years later than this in 2035," Carbon Tracker and Imperial College said in a recent report. "By 2050, battery EVs will have saturated the passenger vehicle fleet, which accounts for 69% of the road transport market. Ice vehicles now account for just 12-13% of the total fleet, almost exclusively due to demand in medium-duty vehicles and commercial trucks." Carbon Tracker's most ambitious scenario sees more than 1.1bn EVs on the road by 2040, compared to the IEA's forecast of 150m.

Battery costs

The sharp and rapid fall in battery costs is one reasons for such bullish forecasts. Those figures represent a big part of the total cost of an EV, and fell from around $1,000 per kilowatt-hour in 2008 to around $350/KWh by 2015, according to BNEF.

If anything, the cost will fall further too. According to research carried out by the Carbon Tracker Initiative and Imperial College London, "most studies believe EVs will be cost-competitive with Ices when battery costs are between $150-300/KWh, and Tesla already claims that batteries will cost as little as $100/KWh by 2020."

As for oil demand, EVs will probably just be part of a broader array of threats. Most analysts interviewed say steadily increasing fuel-economy standards will be the main one. "Far less is said about fuel efficiency and economy, which I see is a much bigger factor in the overall oil demand of the fleet," says Richard Mallinson, a partner at Energy Aspects, a consultancy. "The efficiency trend is a much larger part of determining the rate of oil-demand growth."

BP examined the outlook for EVs and oil demand in some depth in its annual Energy Outlook this year. Cars presently account for 19m b/d of liquid-fuel demand, or about 20% of total oil consumption.

Estimating that overall demand for car travel (and therefore fuel demand) will double by 2037, BP pointed out that "improvements in fuel efficiency reduce this potential growth significantly as manufacturers respond to stricter vehicle emission standards". While EVs numbering 100m would cut 1.2m b/d from oil demand, "this is around a tenth of the impact of the gains in vehicle efficiency".

As a result, BP sees cars' demand for liquid fuels rising to 23m b/d by 2035, with efficiency accounting for 17m b/d of reduced demand compared with a business-as-usual scenario. But even with another 100m EVs on the road by then, the cut to oil demand will be just 1.4m b/d.

BNEF analyst Elena Giannakopoulou, by comparison, thinks an EV share of the market of 35% in 2040 "will equate to a displacement of 13m b/d of oil demand." Fuel efficiencies are expected to affect oil demand on top of that, she says.

Iain Mowat, an analyst with Wood Mackenzie, agrees. "Fuel-efficiency improvements that have been mandated for passing cars really are the key driver in declining oil demand for passenger cars," Mowat says. "Later on, it's EVs that become important." Wood Mackenzie, he says, expects EVs to be fairly marginal until 2035.

But agreement on the impact is hard to find—and the cost of EVs will be crucial. Carbon Tracker's report talks of a "profound" penetration by EVs into oil's territory. "Under original EV-cost assumptions and climate policy, global oil demand peaks in 2030 after relatively strong growth from 2012. With our lower EV-cost assumptions instead, oil demand peaks in 2020 and plateaus for 10 years at a level 10% lower than under original cost assumptions." Oil demand falls steadily in all scenarios from 2030-50, it says.

 This article is part of a report series on Electric vehicles. Next article is: Electric threat

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