The end is nigh for oil. You read this everywhere, so it must be true. Sales of electric cars are taking off. A few countries—the United Kingdom, France and India among them—have announced plans to ban the sale of new vehicles powered solely by internal combustion engines. Fuel economy in cars powered by gasoline or diesel is climbing, which will put another crimp in petroleum demand.
Even Norway's $1-trillion (all currency in U.S. dollars) sovereign wealth fund wants to ditch its oil and natural gas investments. Its managers haven't been fully clear about the reasons, but it's likely not because of a moral problem with fossil fuels. Rather, they apparently fear the world is about to enter an era of declining oil consumption and permanently low prices.
If they're gambling on a trend, they're not alone. By late December, the oil and gas sector of the benchmark European Stoxx 600 index was down about 3% on the year, even though oil prices had climbed by close to 15% and the overall index was up more than 8%. The big performance gap suggests oil investors are cashing out.
At least some are probably stampeding into shares of electric-car maker Tesla. Its stock price soared by about 60% in 2017, giving the company a stock market value of $56 billion, on par with General Motors.
If the tech industry is enamoured with one word, it is "disruption," and oil markets certainly seem rattled as the electric revolution gains momentum. The problem with the vision is that there is no electric-inspired disruption, at least not yet.
Global oil demand continues to climb, while the percentage of electric cars on the road is negligible. Relatively speaking, it should remain negligible for many years, unless there is a great technological leap that would see battery prices plummet and the range of the cars they propel double. But there is no sign that such a breakthrough is imminent. Old-fashioned lithium-ion batteries, which have been in commercial production since the 1990s, still power even the newest e-cars.
For oil bulls, a vanishing species, one number that should give even greater encouragement is 1.8 billion. That is oil giant BP's forecast of the size of the global auto fleet by 2035, a rise of about 80% from the current level. Other forecasts are also bullish. Transportation—cars and trucks—will eat up almost half of global oil production.
Most of those new vehicles will continue to be fully or partially powered by petroleum. In a recent article in the Financial Times, Cuneyt Kazokoglu, head of oil demand at Facts Global Energy, an oil and gas consultancy, says just 10% of the global auto fleet will be fully electric by 2040, with hybrids taking up another 20% (hybrids, like the Toyota Prius, have combined gasoline and electric motors).
Kazokoglu's estimate seems reasonable. Yes, electric car sales are rising sharply, but they're climbing from a very low base. The total sales are piddling, despite often-lavish government purchase incentives, and perks such as free parking and no road taxes or highway tolls in some countries.
Global e-car production reached just 500,000 vehicles in 2016, a sliver of total light vehicle production of 70 million. Tesla, the biggest U.S. maker of electric cars, produced just 80,000 units in 2016. In 2017, the number was expected to reach 100,000. The world's bestselling e-car, the Nissan Leaf, has sold fewer than 300,000 units from its launch in 2010 to mid-2017.
Even if the market share of electric cars were to quadruple over the next decade or so, they would account for less than 3% of worldwide auto sales. That kind of increase is very doubtful, in large part because many governments are trying to roll back purchase incentives.
It's politically difficult to keep the incentives. E-cars are generally luxury items—the Tesla Model S starts at about $80,000. Critics complain that the subsidies transfer wealth from the unrich to the rich. In the United States, the sales incentives for the Leaf, which has a base price of roughly $30,000, have averaged about $16,000. But watch what happens when incentives drop off. In late 2015, Denmark announced the phase-out of some e-car subsidies. Electric car sales quickly fell by 60%.
Meanwhile, gasoline and diesel remain cheap. In the United States, gas is about $2.50 a gallon (roughly 85 Canadian cents per litre). Fuel-guzzling SUVs and crossovers are still the hottest sellers by far, and electric SUVs are virtually non-existent. Every year, global vehicle production rises by about two million units. As the auto craze hits Asia, most of the hundreds of millions of new cars and SUVs sold will run primarily on gasoline or diesel.
Far from falling, oil demand is set to rise steadily for decades, despite the undeniable environmental benefits of e-cars. Given the slowdown in oil exploration and the paucity of big oil discoveries, oil prices seem more likely to rise than fall. Pity the planet but praise the oil investors who stayed put.
Eric Reguly