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Oil's electric shock

More EVs will push their way onto the road as new affordable models are rolled out

In 2018, Nissan will finally release an update to its popular electric vehicle (EV), the Leaf. It will get 150 miles a charge, in the mid-range of EVs on the market. The breakthrough is in the price: $30,000. In California, generous state- and federal-tax credits will bring that cost down as much as $10,000. Even a middle-income buyer in Texas, which doesn't offer a tax credit, whose tax liability only allows them to use half the federal credit, could buy the Leaf for $26,250. For a car that will save at least $4,000 in fuel costs over the first decade of its life, that's a great price. It's also a dangerous price for both the auto industry and especially the oil industry.

The EV-affordability window wasn't supposed to open until 2020, at the earliest. But the rate at which costs are declining for solar power, wind power and now the battery packs that power EVs is happening much faster than expected. While broader affordability is only just starting to appear, EV sales growth in both the US and now China is already taking off. In the US, EV sales have been rising by 35% per year, and should push towards 40% growth in 2018. In China, sales are growing at an even faster clip, around 45%.

EVs' rise is bringing the peak sales year for internal combustion engine (Ice) passenger cars ever nearer. Let's be specific. In America, sales of all light-duty (LDV) vehicles rose by just 0.4% in 2016, from 17.39m to 17.46m, with EVs taking roughly two-thirds of that marginal growth. In 2017 and 2018, total US sales growth of LDVs is expected to roll over into outright decline—leaving 100% of the growth to EVs. The market's structural shift is not as pronounced in China, where absolute growth in the car market will continue in 2018, albeit at a slower pace. China sold around 0.53m new energy vehicles (NEVs) in 2017 against a total car market of 28.5m. But NEV sales in China could easily reach 0.75m in 2018 in a market that only grows by 1m to 1.5m new car sales.

35%—Annual EV sales growth in the US

Many analysts are engaged in a pointless exercise, trying to peg the distant year when the entire global vehicle fleet will be swapped out for EVs. But the more urgent question is where markets are impacted first: at the margin. Nissan's longer-range 2018 Leaf is expected to be followed by a 2019 model going even farther, about 200 miles. That 2019 model might cost more than $30,000, but it's now conceivable that by 2020-21, the industry will offer 200 miles of range at a price closer to $27,500. No tax credits needed. In China, roughly half of NEV sales are already in the "ultra-affordable" category of minis and super compacts. For oil and car markets, the revolutionary turning point doesn't come in 2035, or 2040, but rather when the growth rate for their products falls to zero.

The US Energy Information Administration has projected that US oil consumption, which still sits below the record set ten years ago, will peak in 2019 before rolling over into permanent decline. Wood Mackenzie reckons that global gasoline-consumption growth will begin to decelerate around 2020, falling into outright decline by 2025.

It's too early to forecast when total global oil demand will enter absolute decline. For that to happen, EVs will need to pass through the affordability window and become cheaper than a comparable Ice offering. Nevertheless, in the US, EV sales didn't quite compose 1% of the market in 2016, but will reach nearly 2% of the market in 2018, and should cross 3% by 2020. That's fast enough to hurt any oil company unprepared for flat demand, or any car company without an EV strategy.

Gregor Macdonald is a writer on global energy and transport from Portland, Oregon

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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