6 September 2016
When Tesla accepted reservations for its new Model 3, which has a starting price of USD 35,000, the car maker was swamped by people eager to put down USD 1,000 as a deposit. Within just a few weeks, 400,000 enthusiasts had ordered a car they hadn’t even seen in the flesh, let alone driven. Delivery is also still some way off, expected to start in 2018. Of course, we acknowledge that the reservation is non-binding and fully refundable if the buyer-to-be changes his mind. Yet, it sends a powerful signal to the car industry. People are ready to switch from petrol and diesel to electric (and/or plug-in hybrid) once the right car comes along.
The future is electric
Although the pace of the transition is hard to predict, we believe that the long-term future of transportation will be electric. How quickly we will see a meaningful number of electric cars on the streets depends on a variety of factors: the price of oil, battery costs, government policies that may make a switch to electric more attractive, and of course consumer behaviour.
The one point that stands out is battery costs. It determines to a significant degree the price of cars offered. So far, electric cars that offer enough range for consumers to consider it as their only car are expensive. The price of the battery alone can be the equivalent of a medium-sized car. For Tesla’s flagship model S, analysts estimate the battery’s cost is around 27% of the car’s total price tag for the 90 kWh version.
This means that for electric cars to become economically competitive with petrol vehicles, battery costs still need to be cut significantly. The current cost per kilowatt-hour is around USD 300 (equating to roughly USD 27,000 for the Tesla S battery). According to industry estimates, the cost will be halved within the next five to seven years, based on economies of scale as more cars are produced, as well as efficiency gains within the production process. This will make the cost of owning an electric vehicle much more competitive relative to internal combustion cars. This calculation assumes some moderate government subsidies of the kind we are seeing already in some countries.
Forecasts vary wildly
Currently, almost two-thirds of global oil demand is used for transportation, of which 85% is road transportation. This means electric cars will have a major impact on oil demand once their number grows to a significant part of the total car fleet. But this is still a long way off: Only around half a million electric cars were sold in 2015. The global fleet of electric cars is around one million, less than 0.1% of cars on the road. Long-term estimates for electric car penetration vary widely, and are basically anyone’s guess. Even looking forward to just 2025, forecasts for global electric car sales vary between 5% and 15% of total sales. If we accept an optimistic estimate of 40% annual growth rate of electric car sales, then by 2020 this would result in an electric car fleet of 8.5 million vehicles or 0.6% of global car stock.
Further out, these extrapolations become ever more inaccurate, but if we stick to the same growth rate until 2025, then the cumulative electric car fleet would result in 50 million vehicles or 3.3% of the total number of cars.
Substantial impact on oil demand still a decade away
These calculations show that even on the more optimistic assumptions, the share of electric cars on our streets will remain comparatively low for at least another decade. By 2020, it would mean a reduction of 0.3% of global oil demand, by 2025 the reduction would be 1.7% or 1.7 million barrels per day.
In a nutshell, compared with other forces that impact the supply and demand of oil, electric cars will be a small factor for the foreseeable future. Over the next three to four years the impact of electric vehicles can be ignored. Over this time horizon, for which we can predict developments with some degree of confidence, we expect the crude oil market to remain tight as a result of the massive investment cutbacks of the oil exploration and production industry.
Looking further out, we would anticipate peak demand for oil to occur sometime after 2025, but probably not before 2030, at which point electric vehicles are likely to become a more significant driver of the demand trajectory.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.