The Real Oil Crisis - Autonomous Electric Vehicles

An oil crisis, but not the one in the news

While most eyes are focused on the current macroeconomic demand / supply imbalance causing oil prices to remain under $40 a barrel, the real crisis for oil is accelerating – the adoption of autonomous electric vehicles. 

My team recently did a large piece of work on the automotive industry – what the key pressures are today, and what it might look like in 2030 and beyond. One C-suite executive in an auto firm described it as the best bit of work they had seen from a bank (a low benchmark perhaps, but we'll take it). However, one topic we didn't cover in depth is what it all means for oil. 

Less than 1% adoption so far...

There are over 1 billion petrol driven vehicles globally, and roughly 45% of barrel oil goes to powering them.  Take the US and China as the world’s largest car markets – in 2015 less than 1% of cars on the road in the US and China were electric.  However, adoption rates have been staggering. Compared to 2013, this sub-1% share still represents a 130% increase in in the US, and 800% increase in China. Even in some of the fastest automotive growth markets – China, India and ASEAN – which are still inclined to buy petrol cars today, the infrastructure is growing and the culture leaning towards it.   

...but we are at the tipping point

 However, even this growth is a snapshot taken at the hockey stick point of the S-curve (a typical technology adoption model). As hybrids become cheaper, all-electric vehicles and the infrastructure to support them becomes viable, and hydrogen and other technologies come online, the sensibility gap to petrol engines will widen further. This accelerated adoption is also compounded by global regulatory pressure and incentives, and a crisis of confidence in diesel which spread from a brand-specific issue to another nail in the coffin for combustion. 

OPEC expects just 5% of vehicles will be all electric by 2040.  This is a ludicrous assertion when auto and tech firms are investing billions in all electric autonomous vehicles today, and Norway alone is already at 22%. Either OPEC is wrong, or Google and the entire auto supply chain would be bust by 2040.  I know which side I would back.

Dude wheres my cars? We're at the tipping point of two S curves of adoption

Furthermore, not only will vehicles be less reliant on petrol, but there will be less of them. The average use of a vehicle is around 30 minutes a day - there are almost no examples elsewhere of such underutilised assets. The inevitable transition to shared autonomous vehicles means optimal allocation of out of use vehicles. Many of us will use a car when we need one rather than own it - be it the Zipcar ‘borrow on demand’ model or, taken to the extreme, a shared autonomous vehicles which already know where you are going without asking (and may not even ask you to pay). Even haulage and delivery will be autonomous drones on land and in air.

 The combination of hybrid technology and Uber gives us a glimpse into the possibility. In just over ten years, the Toyota Prius has gone from an oddball celebrity vehicle which Toyota was losing money on, to being the fastest selling used car in Britain today, and ubiquitous choice for pay-as-you-go shared transport (a.k.a. Uber). Extrapolate to this pay-as-you-go shared infrastructure being the default, and all-electric rather than hybrid, and you have a real demand crisis for oil.  

Toyota's hydrogen fuel cell Mirai. And some equally ugly #badtaxidermy.

So what does this mean for oil?

In 2014 around 3 billion barrels of oil were consumed in the US. Let's imagine in 2030 we have a 20% market share of electric vehicles, and further 30% hybrid. Even ignoring other drags on oil, and conservatively assuming 5 barrels a year consumed by a petrol vehicle, that could mean up to half a billion less barrels consumed per year in the US alone.

Ultimately there are many complex drivers for oil demand, and the price could be supported by lower production. However, without question it will be a commodity less in demand. I would speculate on that basis that we could see levels around the current mark for the long run, and the supply side needs to structurally adjust for the long term.

The new normal for transport means a new normal for oil. The danger is no longer one of running out of oil, but running out of a need for it. In which case, the crisis in fact spreads, and the challenge becomes as much macroeconomic and geopolitical as environmental given the implications for country trade flows and job losses in the industries affected.