Oil Demand, Autos, EVs: A California Case Study

Electric Vehicles, or EVs, are an increasingly important variable for world, national, and regional oil demand. EVs, unlike internal combustion engine vehicles, are powered by a battery, with fuel sourced from the electricity grid. EV adoption could therefore reduce crude oil demand. In this article, we’ll discuss the current status of EV adoption, as well as some potential future outcomes in the auto world. We’ve analyzed the EV market systematically, so if you’d like a more comprehensive look at the EV market, drop us a line at info@enkonenergy.com.

EV adoption is mostly a California story… for now

One saw in the auto industry is that EVs will always be the automobile of tomorrow. The reasons behind this joke are comprehensible: EVs receive an amount of time and attention that is completely disproportionate to their current market influence; electric vehicle adoption has been largely confined to California; and, speaking bluntly, many folks in the automobile industry and O&G complex don’t want EVs to succeed.

But EVs are no laughing matter. More and more industry leaders publicly debating peak oil demand – and many see EVs as a key driver behind lower future oil demand. Indeed, EVs will increasingly challenge internal combustion engines for market share.

EVs are increasingly efficient

The “sticker price” of all-electric vehicles has fallen considerably over the past decade: the Tesla Model 3 base model cost a little over $35,000 in 2017 dollars; Tesla claims it will “create” a $25,000 EV within three years. We’re skeptical of the timeline and the final sticker price, but more confident of costs trending f lower. Indeed, EVs can compete well on total ownership costs, or a car’s lifetime costs. A recent Consumer Reports study suggests that EV drivers will save an average of 50% when compared to similar internal combustion engines. That estimate seems aggressive, but also plausible.

Most EV models have shared an important trait: they tend to be light, compact cars. What we’ve found in modeling future fuel demand, however, is that replacing compacts and sub-compacts with EVs has little impact on consumption. The reason is simple: light cars tend to already enjoy excellent or even outstanding fuel economy. On the other hand, SUVs, Pickups, and Vans tend to have relatively poor fuel economy, and typically cannot travel more than 19 miles without consuming a gallon of gasoline. Once electric SUVs and pickups hit the road, gasoline demand destruction could accelerate.

The electrification of SUVs and pickups – or “high riders” – could become the major energy story of the 2020s, particularly towards the latter half of the decade. At least 19electric SUV and pickup models will hit the road this year, with many more on the way. While startups such as Bollinger Trucks have entered the space, established players are also making sizable investments.

Amazon and Ford have invested over $1.2 billion into the EV truck producer Rivian. Amazon has pledged that at least 100,000 of its ubiquitous delivery vans will use Rivian’s model as part of its “electric delivery vehicle.” It remains to be seen if this is a discrete event or part of a larger trend, but if other large fleet owners move to EVs the effects could be highly significant.

Policy and consumer support for EVs

While EVs are largely gaining a foothold because of their increase economic competitiveness, policy may nudge further adoption. Many states, localities, and even national governments are beginning to adopt EV mandates, requiring that all new cars and passenger trucks produce zero emissions. In September, California announced that all new cars and passenger trucks must be zero emission by 2035; New Jersey followed suit less than a month later. Policymakers and consumers appear to increasingly favor EVs over internal combustion engines.

Car Ownership: Uncertainty from COVID

Of course, even if EVs were to suddenly vault to 100% of all new car sales by 2024 (which won’t happen, by the way), the legacy internal combustion engine fleet will remain in-service for years, probably more than a decade. Cars have longer lifespan: probably more than 12 years for most new cars, and the average life of the fleet is over 11 years. Therefore, gasoline demand will be around for a long time: a lot will depend, of course, on consumer driving habits.

Due to the COVID-19 pandemic, consumers have increasingly turned away from public transportation and towards used cars. Indeed, some used car outfits are reporting record-breaking sales. It remains to be seen whether this is a temporary or permanent consumer shift. Even so, gasoline demand has not recovered, with U.S. vehicle miles traveled in August 2020 down 12.3% from the prior year. While some of the fall is attributable to reduced GDP growth, we suspect work-from-home trends will also continue to chip away at fuel demand.

Post-COVID

We still don’t know which habits will stick in the post-COVID world – or even if that day will come. It does seem likely, however, that EVs will absorb an increasing proportion of the U.S. auto market, limiting gasoline demand and, in all likelihood, decreasing it. With EV adoptions limiting domestic crude and crude products demand, the U.S. O&G complex will increasingly turn to exports, even more so than now. We’ll discuss this in a future article.