Electric Vehicle Adoption and Oil Demand
Summary
There has been a lot of coverage of electrical vehicle (EV) adoption leading to the demise of gasoline and diesel over the course of the last month. At the beginning of February, Adam Jonas, an analyst with Morgan Stanley, was reported (1) as saying that the market may be ascribing zero or negative value to the car manufactures internal combustion engine (ICE) assets.
As of February 4th, 2021, Tesla was valued at $810 billion, the fifth most valuable company in the S&P 500 (2) and worth more than the next seven most valuable car manufacturers combined. General Motors, which would be worth more than $4 trillion if it was valued on the same vehicle sales to market capitalization ratio as Tesla, announced that it aspired to a target of phasing out all internal combustion engine vehicles from its line up by 2035 (3).
The objective of this paper is to explore how the growth in the sales of EVs will impact future oil demand. The first section of the paper looks at long term oil forecasts and what they assume about EV adoption. The second section uses historical sales and installed base data for both EVs and ICEs to determine whether there is a statistically significant relationship between sales and installed base. The third section uses this relationship, combined with forecasts of future vehicle sales, to estimate the impact on oil demand in 2030.
The paper shows that EVs are projected to constitute 32% of sales and 8% of the installed vehicle base in 2030, falling some way short of the electric vehicle adoption assumptions that underpin both the International Energy Agency ‘Stated Policies’ and ‘Sustainable Development’ scenarios. This suggests oil demand in 2030 will be higher than predicted under these scenarios and that continued demand for ICE vehicles and oil is likely to continue into the 2030’s at least.
Electric Vehicle Adoption and Oil Demand
Oil is used primarily for petrochemicals and transportation, so in thinking about long term oil demand, the likely trajectory of ICE and electric vehicle EV sales is certainly worth spending some time on. A previous paper on long term oil demand by this author, published by the Petroleum Economist , concluded that that the IEA ‘Stated Policies’ or OPEC long term oil demand looked most likely.
As noted in that paper, one of the issues in assessing these forecasts is that the underlying assumptions aren’t articulated. We are fortunate when it comes to the question of EV penetration, as the IEA does explicitly link the EV installed base with its two scenarios - the IEA’s ‘Stated Polices’ and ‘Sustainable Development’ scenarios as shown in Figure 1. The ‘Stated Policies’ scenario is intended to reflect oil demand under current policies and shows demand rising slowly through 2030, reaching just over104 MMbbl/day, and maintaining this level through to 2040. The IEA’s ‘Sustainable Development’ scenario is intended to reflect oil demand in a world where global warming is limited to 2 degrees centigrade above pre-industrial levels. This sees oil demand falling from 2019 to just under 70 MMbbl per day by 2040.
Figure 1 - IEA Long Term Oil Demand Forecasts
The total installed base of EVs under each of the IEAs’ scenarios (5) is shown in Figure 2. Under the ‘Stated Policies’ scenario, these reach 138 million vehicles in 2030, while under the ‘Sustainable Development’ scenario, these reach 244 million vehicles by 2030. The IEA includes battery and plug in hybrid cars, trucks, and buses under their definition, but excludes two and three wheeled vehicles.
Figure 2 - IEA Total Installed Electric Vehicle Base
Historical Sales and Installed Base
The author was unable to find any publicly available forecasts of the installed base of EVs but was able to find historical data on sales and EV and ICE installed bases, and projections of future sales. Historical sales data (6), (7), (8) and sales projections (9) for each vehicle type is shown in Figure 3. As this shows, ICE sales peaked in 2017 and have been declining ever since, with a particularly sharp drop in 2020. EV sales have been rising from zero less than a decade ago, and while they flatlined in 2020, they did not fall back. Deloitte predicts that ICE sales will grow at 3% per annum through to 2025, before declining at 3% per annum to 2030. It predicts EV sales will grow at 35% year on year through 2025, before slowing to 23% growth per annum through to 2030. By 2030, Deloitte predicts that 30% of all global vehicle sales will be EVs.
Figure 3 - Annual Global Vehicle Sales (2005-2020) and Deloitte Forecast to 2030
The installed base (5), (10) of each vehicle type is shown in Figure 4. While EV sales growth has been rising, as of 2020 they only had an installed base of 10 million vehicles, as opposed to 1,320 million ICEs. The installed ICE base continued to grow through 2020, despite the fall in sales.
Figure 4 - Installed Base of ICE and EV Vehicles
Linear regression on the ICE and EV datasets showed a strong relationship between historical sales and installed vehicle base (R2>99% in both cases), as would be expected.
ICE and EV Installed Base Projections
These relationships were then used to predict the installed base on both ICE’s and EV’s through 2030. This prediction is shown in Figure 5.
Figure 5 - ICE and EV Installed Base Forecast
As Figure 5 shows, the model predicts a drop in the installed ICE base over the next few years. This reflects the fall in ICE sales since 2017 and can be expected to have an impact on oil demand over the near term. In general, though, the model shows the ICE base will fluctuate between 1,100 and 1,200 million units for the rest of the decade. The model also shows that while the EV base continues to grow, it will still only constitute 95 million vehicles, or 8% of all vehicles, by 2030.
Returning to the IEA scenario assumptions, the installed EV base, based on the Deloitte forecast and this model, would fall some way short of the installed base required for either the ‘Stated Policies’ or ‘Sustainable Development’ scenarios. See Figure 6.
Figure 6 - Glenloch Energy Forecast and IEA Scenario Installed EV Base
The Deloitte sales forecast shown in Figure 3 serves to undermine the argument that ICE manufacturing capacity has no or negative value, as they predict that 70% of vehicle sales will still be ICEs in 2030.
The second conclusion that can be drawn from the modelling work here concerns the impact of EV adoption on long term oil demand. The lower EV base predicted here implies that oil demand in 2030 will be 0.6 MMbbl/day higher than under the IEA ‘Stated Policies’ scenario.
Based on these conclusions, it seems premature to abandon either ICE manufacturing, production of crude oil or refining of crude into gasoline and diesel.
(1) "Morgan Stanley: Gasoline Industry Is About to Become Totally Worthless", Oilprice.com, February 10th 2021.
(2) "Market capitalization of largest companies in S&P 500 Index as of February 4th, 2021", Statista
(3) "GM to Phase Out Gas- and Diesel-Powered Vehicles by 2035", Wall Street Journal, January 28th 2021.
(4) "Oil Demand Through The Energy Transition", Glenloch Energy, January 2021
(5) IEA (2020), Global EV Outlook 2020, IEA, Paris
(6) IEA, Global car sales by key markets, 2005-2020, IEA, Paris
(7) McKinsey Electric Vehicle Index: Europe cushions a global plunge in EV sales, McKinsey & Company, July 17th 2020
(8) Electric Vehicles in 2013: a Progress Report, Transport and Environment, July 2014.
(9) Electric Vehicles: Setting a course for 2030, Deloitte Insights, 28th July 2020
(10) The road to 2020 and beyond: What’s driving the global automotive industry?, McKinsey & Company, August 2013.
Electric Vehicle Adoption and Oil Demand
Summary
There has been a lot of coverage of electrical vehicle (EV) adoption leading to the demise of gasoline and diesel over the course of the last month. At the beginning of February, Adam Jonas, an analyst with Morgan Stanley, was reported (1) as saying that the market may be ascribing zero or negative value to the car manufactures internal combustion engine (ICE) assets.
As of February 4th, 2021, Tesla was valued at $810 billion, the fifth most valuable company in the S&P 500 (2) and worth more than the next seven most valuable car manufacturers combined. General Motors, which would be worth more than $4 trillion if it was valued on the same vehicle sales to market capitalization ratio as Tesla, announced that it aspired to a target of phasing out all internal combustion engine vehicles from its line up by 2035 (3).
The objective of this paper is to explore how the growth in the sales of EVs will impact future oil demand. The first section of the paper looks at long term oil forecasts and what they assume about EV adoption. The second section uses historical sales and installed base data for both EVs and ICEs to determine whether there is a statistically significant relationship between sales and installed base. The third section uses this relationship, combined with forecasts of future vehicle sales, to estimate the impact on oil demand in 2030.
The paper shows that EVs are projected to constitute 32% of sales and 8% of the installed vehicle base in 2030, falling some way short of the electric vehicle adoption assumptions that underpin both the International Energy Agency ‘Stated Policies’ and ‘Sustainable Development’ scenarios. This suggests oil demand in 2030 will be higher than predicted under these scenarios and that continued demand for ICE vehicles and oil is likely to continue into the 2030’s at least.
Electric Vehicle Adoption and Oil Demand
Oil is used primarily for petrochemicals and transportation, so in thinking about long term oil demand, the likely trajectory of ICE and electric vehicle EV sales is certainly worth spending some time on. A previous paper on long term oil demand by this author, published by the Petroleum Economist , concluded that that the IEA ‘Stated Policies’ or OPEC long term oil demand looked most likely.
As noted in that paper, one of the issues in assessing these forecasts is that the underlying assumptions aren’t articulated. We are fortunate when it comes to the question of EV penetration, as the IEA does explicitly link the EV installed base with its two scenarios - the IEA’s ‘Stated Polices’ and ‘Sustainable Development’ scenarios as shown in Figure 1. The ‘Stated Policies’ scenario is intended to reflect oil demand under current policies and shows demand rising slowly through 2030, reaching just over104 MMbbl/day, and maintaining this level through to 2040. The IEA’s ‘Sustainable Development’ scenario is intended to reflect oil demand in a world where global warming is limited to 2 degrees centigrade above pre-industrial levels. This sees oil demand falling from 2019 to just under 70 MMbbl per day by 2040.
Figure 1 - IEA Long Term Oil Demand Forecasts
The total installed base of EVs under each of the IEAs’ scenarios (5) is shown in Figure 2. Under the ‘Stated Policies’ scenario, these reach 138 million vehicles in 2030, while under the ‘Sustainable Development’ scenario, these reach 244 million vehicles by 2030. The IEA includes battery and plug in hybrid cars, trucks, and buses under their definition, but excludes two and three wheeled vehicles.
Figure 2 - IEA Total Installed Electric Vehicle Base
Historical Sales and Installed Base
The author was unable to find any publicly available forecasts of the installed base of EVs but was able to find historical data on sales and EV and ICE installed bases, and projections of future sales. Historical sales data (6), (7), (8) and sales projections (9) for each vehicle type is shown in Figure 3. As this shows, ICE sales peaked in 2017 and have been declining ever since, with a particularly sharp drop in 2020. EV sales have been rising from zero less than a decade ago, and while they flatlined in 2020, they did not fall back. Deloitte predicts that ICE sales will grow at 3% per annum through to 2025, before declining at 3% per annum to 2030. It predicts EV sales will grow at 35% year on year through 2025, before slowing to 23% growth per annum through to 2030. By 2030, Deloitte predicts that 30% of all global vehicle sales will be EVs.
Figure 3 - Annual Global Vehicle Sales (2005-2020) and Deloitte Forecast to 2030
The installed base (5), (10) of each vehicle type is shown in Figure 4. While EV sales growth has been rising, as of 2020 they only had an installed base of 10 million vehicles, as opposed to 1,320 million ICEs. The installed ICE base continued to grow through 2020, despite the fall in sales.
Figure 4 - Installed Base of ICE and EV Vehicles
Linear regression on the ICE and EV datasets showed a strong relationship between historical sales and installed vehicle base (R2>99% in both cases), as would be expected.
ICE and EV Installed Base Projections
These relationships were then used to predict the installed base on both ICE’s and EV’s through 2030. This prediction is shown in Figure 5.
Figure 5 - ICE and EV Installed Base Forecast
As Figure 5 shows, the model predicts a drop in the installed ICE base over the next few years. This reflects the fall in ICE sales since 2017 and can be expected to have an impact on oil demand over the near term. In general, though, the model shows the ICE base will fluctuate between 1,100 and 1,200 million units for the rest of the decade. The model also shows that while the EV base continues to grow, it will still only constitute 95 million vehicles, or 8% of all vehicles, by 2030.
Returning to the IEA scenario assumptions, the installed EV base, based on the Deloitte forecast and this model, would fall some way short of the installed base required for either the ‘Stated Policies’ or ‘Sustainable Development’ scenarios. See Figure 6.
Figure 6 - Glenloch Energy Forecast and IEA Scenario Installed EV Base
The Deloitte sales forecast shown in Figure 3 serves to undermine the argument that ICE manufacturing capacity has no or negative value, as they predict that 70% of vehicle sales will still be ICEs in 2030.
The second conclusion that can be drawn from the modelling work here concerns the impact of EV adoption on long term oil demand. The lower EV base predicted here implies that oil demand in 2030 will be 0.6 MMbbl/day higher than under the IEA ‘Stated Policies’ scenario.
Based on these conclusions, it seems premature to abandon either ICE manufacturing, production of crude oil or refining of crude into gasoline and diesel.
(1) "Morgan Stanley: Gasoline Industry Is About to Become Totally Worthless", Oilprice.com, February 10th 2021.
(2) "Market capitalization of largest companies in S&P 500 Index as of February 4th, 2021", Statista
(3) "GM to Phase Out Gas- and Diesel-Powered Vehicles by 2035", Wall Street Journal, January 28th 2021.
(4) "Oil Demand Through The Energy Transition", Glenloch Energy, January 2021
(5) IEA (2020), Global EV Outlook 2020, IEA, Paris
(6) IEA, Global car sales by key markets, 2005-2020, IEA, Paris
(7) McKinsey Electric Vehicle Index: Europe cushions a global plunge in EV sales, McKinsey & Company, July 17th 2020
(8) Electric Vehicles in 2013: a Progress Report, Transport and Environment, July 2014.
(9) Electric Vehicles: Setting a course for 2030, Deloitte Insights, 28th July 2020
(10) The road to 2020 and beyond: What’s driving the global automotive industry?, McKinsey & Company, August 2013.
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