Electric car sales are beginning to obtain traction. Analytically, the numbers are showing growth. But you have no need for a spreadsheet to see the trend. Cars built by Tesla, BMW yet others are turning heads at street corners C and turning investor sentiment too.
So, Arthur’s question was unsurprising. Also it was exactly the same question that’s simmering on the frontal lobes of many energy investors I know: “These situations are likely to clobber oil prices aren’t they?”
I paused before answering Arthur on the speaker phone, because I’m always wary of 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 originates and gone at least three times in my 30-year career.
“Maybe they’ll,” I replied hedging my answer, “it’s hard to argue from the simple logic that’s charging up the headlines: planet will require share of the market from their gas guzzling peers, reduce petroleum demand, and can therefore zap the cost 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 C and electric car hype C is likely to drive the cost of oil up, not down.”
Now it was Arthur’s turn to offer a pregnant pause. I possibly could sense behind the speaker he wondered 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 insufficient scale.”
Our conversation went on to discuss the gist from the looming problem. The appetite of oil companies to spend billions on big, long-term projects has already been diminishing C diminishing faster than what is likely to be the development in demand-side substitutes. Quite simply, the timing is off: investment into upstream oil capacity C such things as big offshore platforms C within the next Ten years will probably decline faster than electric vehicles can grow.
“Your phone call is symptomatic of broader sentiment.” I said. “Unease surrounding the first credible threat to grease in A century is altering perceptions of risk and return. Shareholders like you, boards-of-directors and CEOs are already questioning whether or not to expose billions of dollars to big, multi-decade megaprojects with today’s affordable prices. The growing threat of gradual obsolescence will only actually amplify perceptions better risk and lower return C that will hose down still-needed investment into future oil reserves.”
“So what you are saying is that divestment out of long-term big oil projects has 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. Within the next few years the headlines will legitimately boast impressive growth rates of EV sales C there are a lot of views available, but we’ll probably hit a million-a-year globally by 2020, maybe more. Analysts will get overzealous about exponential adoption forecasts as automakers unveil more models. The psychology will chafe on decision makers; oil companies, beholden to their shareholders is going to be increasingly reluctant to making investments into long-cycle mega-projects. The faster EV sales grow, the higher the perceived risk to big oil projects, the slower the interest rate of investment. So, the backbone of global oil supply will probably contract in capacity C massive delays and cancellations are already seeding this trend.
Meanwhile even the most sophisticated math won’t overcome the staggering scale in our oil addiction. A million electric vehicles sales each year may be enough to displace 50,000 barrels each day, but that’s de minimis when compared to 100-million-barrels-a-day the world will be guzzling by the end of the decade.
Wrapping in 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 grease transportation are quickly forthcoming. Yet mainstream behaviour is still anchored in buying bigger petroleum-powered vehicles.”
“So there’s more focus on divesting oil supply than on divesting oil demand,” stated Arthur. “I agree that implies higher oil prices.”
“Maybe,” I said again hedging my response, “and we’ll certainly possess a more thrilling conversation concerning the potential of electric vehicles next time we’ve higher oil prices.”
Peter Tertzakian is chief energy economist and md at Calgary-based ARC Financial Corp.
