The recent tone of oil market has largely been defined by the United States’ headstrong 2018 rendition of foreign policy. With the eclipse of the looming November 4th deadline marking the end of the 180 day revival period of pre-JCPOA sanctions on Iran, the release of importation waivers to 8 oil importing countries and the seeming end to the U.S. – China Trade war, it is very easy to get swept up in a sea of myopic oil analysis. As such, it may be worthwhile to take a step back and discuss the potentially more long-lasting changes that are staring down oil markets and the potential challenges that may be encountered. Tesla’s blowout third quarter, netting a $1.75 earnings per share (despite an expected loss of $0.19 per share), offers a chance to consider the position of electric cars in the future once more.
The transition from fossil-fuel powered vehicles to electric motor vehicles (EVs) is often spoken about as an absolute certainty in the medium to long-term, but faces a number of impediments that are largely glossed over. The most notorious concern that automakers have faced is the historical premium that electrics cars have commanded over the years. According to AlixPartners, the average electric car costs $9000 more to build (driven largely by the cost of high storage batteries) than a conventionally fueled one in 2018. Put into context, there is an understandable apprehension among automakers when the average vehicle costs slightly more than $33,000 in 2017. However, tremendous capital investment into the production of electric cars has allowed pioneers such as the Tesla to drive down the price of its entry level model, with the entry level version of the new Model 3 Tesla (scheduled for full release in 2019) coming in at a $34,200, after gasoline and federal tax incentives being taken into account (from a gross sale price of $46,000). Though there is still a long way to go for EVs to be price competitive against fossil-fuel engines, if the rapid pace at which battery technology is improving is any indication of what the future holds then there is a lot of promise. Large batteries are being increasingly used to combat small scale power grid failures and the first 100MWH battery is expected to be completed by early 2019/2020.
One crucial area of consideration that commonly goes unconsidered in discussions of the distance of an EV mainstream is the size of the secondary car market. The used car market in the United States had annual sales of $350 billion in 2015 which amounted to almost 50% of the auto market within the country. Though not nearly as extreme, the secondary car market is increasingly prevalent in other areas of the world such as China and the U.K.; which saw the sale of 4.18 million vehicles in just the first half of 2016 and has since increased further. It is no exaggeration to say that it would take a complete overhaul of major automakers for us to have an EV dominated or even significant presence on U.S. roads in the short-term, and is likely a phenomena that needs to be gradually phased in over a long-period of time.
Simply put, electric cars are not a straightforward ‘opt-in’. It will continue to be an arduous journey for environmentally focused automakers, whose total market share of electric motor vehicles is estimated at far less than 0.5% (1.9 million EVs on roads in 2017 compared to >1.2 billion cars on the road in 2014). This change will not happen overnight. With 51% of total oil consumption being used to fuel cars through gasoline, it is very likely that electric cars will almost certainly have an impact on oil prices in the long-term. How distant the future of an EV mainstream is remains to be seen. Electric vehicles face a vast number of impediments that are often overlooked, many of which we have not touched on. For example, the usage of electric vehicles will also be largely contingent on the availability of charge points which are almost exclusively a feature of high income countries. Additionally, even ‘Rapid-Charge Points’ take a minimum of 30 minutes to give a full charge (once again highlighting the importance of high storage battery technology), which matches up poorly to the 2/3 minutes average at a petrol station.
Electric vehicles in their current form are far from an inevitability.