The shift from fossil fuel powered vehicles to electric vehicles has been gaining significant attention in recent years due to their potential to reduce greenhouse gas emissions and improve the quality of urban air. As passenger vehicles account for only about a quarter of total oil demand, the electric vehicle sector has been receiving much attention from governments and the media. This article will discuss the potential of electric vehicles to reduce fossil fuel consumption, their current and expected impact on the oil market, and the role of battery prices in the electric vehicle sector.
Outlines:
- Overview of the electric vehicle sector and its potential to reduce fossil fuel consumption.
- Discussion of the current and expected impact of electric vehicles on the oil market, including the role of battery prices.
- Highlighting that while electric vehicles will have a modest impact on reducing oil prices, crude oil is likely to remain a major energy source in the near future.
The Growing Electric Vehicle Market
Since 2014, annual electric vehicle sales have doubled to over 1.5 million units and currently account for barely 2% of new car sales and less than 0.3 percent of the world’s 1.1 billion passenger automobile fleet. China is the largest EV market globally, accounting for over half of global sales in 2018. Government incentives, both to producers and customers, have contributed to the rapid adoption of electric vehicles.
The International Energy Agency (IEA) estimates that 120 million electric vehicles will be on the road in 2030, accounting for around 7% of the worldwide passenger vehicle fleet in that year. EVs are expected to become even more cost-competitive by 2030, thanks to technological advancements in battery production. However, the future viability of EVs is contingent on the ambition of future government environmental regulations.
Transition from Petroleum Cars to Electric Vehicles
Electric Vehicle adoption has resulted in a small reduction in gasoline usage in passenger vehicles. As the number of EVs increases, the shift from internal combustion engines (ICEs) to EVs could significantly impact gasoline consumption. One-third of EVs on the road are battery electric vehicles (BEVs), and two-thirds are plug-in hybrid electric vehicles (PHEVs). PHEVs are equally powered by gasoline and electricity; thus, they use half as much gasoline as an ICE over the same distance.
Impact on Oil Demand
Using a structural vector autoregression (SVAR) model for the global oil market, the influence of gasoline savings due to EVs on oil prices can be determined. Oil prices in 2030 might range from US$85 to US$93, depending on the rate of EV adoption, compared to the IEA’s base-case prediction of US$90.
Electric vehicles account for less than 20% of the worldwide fleet and will therefore have a modest impact on reducing oil prices. As other sectors are more heavily reliant on oil, the forecast for oil demand is dependent on how other industries respond.
Role of Battery Prices
A fundamental underlying driver of EV adoption is the expectation that battery pack costs will exceed $100/kWh, making EVs competitive with conventional vehicles without government or industry subsidies. The cost of a battery pack is currently estimated to be over $200 per kWh. Automobile industry forecasters have predicted that battery costs will rise to $100/kWh by the end of 2021.
Final Thoughts
The increased use of electric vehicles is expected to have a gradual impact on the global oil market. Oil prices in 2030 could reasonably move between US$85 and US$93 per barrel, compared to the IEA’s base-case projection of US$90 per barrel. EVs will account for less than 20% of global passenger traffic, reducing oil prices associated with their adoption will be modest. The major point is that crude oil is likely to remain a major energy source for other sectors in the near future.