How soon will electric vehicles make a significant dent in oil demand?

Khalid Al-Falih may be right when he claims the oil industry has nothing to fear from electric vehicles (EVs).

Saudi Arabia’s oil minister unsurprisingly is a robust defender of the internal combustion engine (ICE). Contrary to the views of Tesla Inc.’s headline grabbing founder Elon Musk, the kingdom’s top energy official expects the conventional gasoline powered road vehicle to remain the bedrock of passenger road transport for generations to come.

“Today 6.5 billion people live in the developing world,” said Khalid Al-Falih, in his opening speech at the International Energy Forum in Riyadh last week. “This will rise to 8.5 billion by 2020. The reality is the dream for many of these individuals is to buy a motorbike, then a car. Given the issues of competitive products, these are unlikely to be electric vehicles.”

Of course, Al-Falih has a vested interest dispelling concerns over peak oil demand despite global climate change concerns.

The kingdom draws a large share of its wealth from the Ghawar field—the world’s largest single onshore deposit of crude. Although, critics will argue Al-Falih has his head in the sand he also makes a fair point. EVs are not the only solution to the world’s future mobility needs, or necessarily the best form of low-carbon transport.

Neither is Al-Falih alone in this view. OPEC’s Secretary General Mohammed Barkindo has given an equally strong defense of oil’s role in powering future transport in the S&P Global Platts Changing Lanes mobility report published on February 19 at the London Oil & Energy Forum.

“It is important to emphasize that oil is expected to remain the most important fuel in the global energy mix for decades to come,” said Barkindo in the report. “In the World Oil Outlook 2017, published last November, there is no peak oil demand in the forecast period to 2040. Moreover, oil will remain the main fuel in the transportation sector, although we do recognize that EVs and other alternative transport means will contribute to a deceleration in oil demand growth, especially in the long term.”

Even if EV technology advances mitigate significant consumer concerns over range, recharging and cost they are unlikely to spell the immediate end of the oil era.

S&P Global Analytics estimates that even if EV’s become the motorists’ vehicle of choice reaching 90% of new car sales by 2030, this will only equate to a 5 million b/d drop in average oil demand from road transportation by 2040.

Even then, total global oil demand would still amount to more than 110 million b/d, or about 10 million b/d more than current consumption.

“To date, fuel efficiency standards in conventional internal combustion engines have resulted in far greater demand destruction,” writes Chris Midgley, Global Director of Analytics at S&P Global Platts in the Changing Lanes report.

Nevertheless, EVs arguably pose the biggest existential challenge for the future of oil as the primary fuel in the road transportation energy mix.

INVESTMENT IN TRANSPORTATION ALTERNATIVES

Double-digit sales growth cannot be ignored especially in major markets such as China. All major automakers are pumping billions of dollars into developing new EV models in the search for a Tesla “killer”.

Meanwhile, Musk’s disruptive automaker is busy launching more affordable models and even electric trucks. For an industry starved of investment since oil prices crashed in 2014 the growth of EVs is more than just an unwelcome distraction.

“There is clear evidence that the oil industry has seen a drop off in investment in recent years, but we see little linkage between observed investment and potential changes in the transport sector. The severe investment declines witnessed in both 2015 and 2016 were a result of the severe oil price cycle the industry was undergoing,” said Barkindo in the special report.

Neither are EVs the only plausible solution to the world’s future road transport needs.

Hydrogen could provide an alternative along with ever more efficient ICE powered vehicles and hybrid models. Growing sales above the level of 2% of the total new vehicles on roads annually could also require a radical improvement in supply chains and the production of key minerals and metals used to produce batteries.

“It’s very difficult to see,” said Bold Baatar, Chief Executive of Energy and Minerals at Rio Tinto in the S&P Global Platts Changing Lanes report. “There is a certain demand upswing coming for sure for copper but is it a supercycle coming for some of the other commodities I just don’t know. If you look at what happened in the previous super-cycle it was the mass urbanization of China and we don’t see another China scenario emerging.”

Meanwhile, big oil companies are hedging their bets but still remain closely aligned to the future of crude. Some like Shell are investing directly in the power sector and EV recharging operators. Others in the sector are more cautious.

However, Al-Falih and many of his peers running the world’s oil industry could also be plain wrong.

Concerns over climate change are real and EVs address the concerns of many consumers in developed markets on the issue. A return of volatile and unsustainably high oil prices, which last pushed crude to a record $147/b in the last decade, could also be a risk. Despite the growth of US shale and the creation of strategic reserves, a serious flare up of tensions between Saudi Arabia and Iran in the Gulf still has the potential to trigger a damaging supply shock.

“I’m taking the view that we’re in the middle of a major global energy transition from hydrocarbon molecules to electrons,” said Professor Paul Stevens, senior research fellow and international oil markets expert at the Royal Institute of International Affairs at Chatham House in London.

“The energy establishment is grossly underestimating the potential for electric vehicles. It’s the proverbial ostrich with its head in the sand,” Stevens said in an interview with S&P Global Platts.