Another take on electric vehicles and the future of oil (take note Alberta, Texas)

Science and data suggest electric vehicles will diffuse slowly, affect oil demand gradually

Laszlo Varro is the chief economist of the International Energy Agency. Safe to assume he has a pretty clear view of the big picture when it comes to energy technology developments. Here’s what he had to say about EVs and the future of oil in a recent blog post: “While there is a legitimate disagreement over the timing and intensity of technology competition to oil, there is no doubt that it is coming.”

I agree with Varro’s argument that competition from EVs is inevitable. But timing and intensity are really the critical issues here.

Oil producers – and governments like Alberta and Texas that rely heavily on associated taxs and royalties – are intensely interested in this question. Trillions of dollars in existing and future assets are at stake; at the peak of the latest oil boom, global upstream investment in 2014 alone was $800 billion, according to the IEA.

So, when are EVs likely to apply significant pressure to gasoline-powered vehicles, and by extension the oil industry?

Depends who you ask.

The most prominent EV booster (or hype cycler, as I like to call them) is Bloomberg New Energy Finance, which published its Global EV Sales Outlook to 2040 in Feb. Here’s what Michael Liebreich, chairman of the BNEF advisory board, and chief editor Angus McCrone had to say about EV sales to 2040:

The central scenario…[is] that 35 percent of new sales would be electric by 2040, and perhaps as high as 47 percent under certain conditions (higher oil prices, more widespread use of car-sharing). If anything, since publishing that forecast, we are tending to think EV penetration will be faster, not slower, despite persistently low oil prices. In the first half of this year, worldwide EV sales were 285,000, up 57 percent on 2015.

Sounds impressive, doesn’t it?

But not so much when you consider that global new car sales in 2016 were 88.1 million and EV sales were 776,000. That means EVs accounted for .9 per cent of auto sales.

Another way to measure EV diffusion is as a percentage of the global auto fleet, which numbered 1.2 billion in 2014 and is projected to rise to 2.4 billion in 2040. The global EV fleet is about 1.3 million, according to the IEA.

That metric puts EV market penetration at .1 per cent.

Which means BNEF is forecasting EVs to go from a tiny fraction of one percent of annual global sales to perhaps as high as 47 percent in 23 years.

That’s hockey stick growth of the most extreme kind. But not impossible if EV advances significantly lower the sticker price (the number one constraint to adoption), dramatically increase range (the number two constraint to adoption), and somehow add significant value that make EVs more attractive than internal combustion engine (ICE) cars.

The chances of any one of those things happening is remote.

Liebreich and McCrone say falling battery costs are the main reason for their bullish forecast. They equate EV battery advances with solar panels, which they claim are “down 65 percent in the past five years.”

The EV battery scientists and analysts I’ve interviewed have a very different view.

Dr. Yi Cui, Stanford: “I expect to reduce the cost by 50%” of Li-ion batteries within 10 years, and “the range would be double for the same weight of battery pack…This is achieved by using Si (in combination with graphite, or high content of Si) at the anode and improving the Li-metal oxide cathodes.”

Tim Grejtak, Lux Research: “I definitely think those numbers [from Dr. Cui] are accurate and about what you’d expect. We’ve seen about 3% or so year-on-year improvement in cost and energy density.”

Dr. Haleh Ardebili, Univ. of Houston: “We are indeed reaching the maximum theoretical change for lithium ion…The commercial types [e.g. EV batteries] of lithium ion batteries – excluding the silicon or other types of anode material – are reaching their maximum capacity.”

Chris Robinson, Lux Research: “Our opinion is that the next generation of batteries that might really start to boost EV adoption are probably going to be a little closer to twenty years. If we look at potential replacements for lithium ion right now, I’m not sure I see any promising technologies on the market. Or even in the lab, necessarily, that can directly replace it in 10 years. But 20 years, maybe.”

In other words, no EV battery revolution for two decades. Just slow, steady improvement in price and performance. Hardly enough to justify BNEF’s wildly optimistic sales forecast.

Are there other innovations coming that might boost EV value for consumers?

Based on the Chevy Bolt, the first “inexpensive” EV to get 200 miles/325 kms to a charge, probably not.

According to Tim Grewe, General Motors general director of electrification, “the peak efficiency of the [Bolt electric] motor has been tested at 97% and the Bolt EV attains a .308 coefficient of drag via the incorporation of aero shutters and underbody aero panels.”

Sounds like Grewe and his engineering team have wrung about all the efficiency available from the Bolt’s propulsion system. And the drag coefficients are impressive. Grewe did say in his emailed comments that “GM continuously is searching for new lightweight materials and control techniques to attain higher efficiency for our next generation products,” but those appear to be minor incremental advances at best.

Now, there is one X factor that could justify that forecast: a business model innovation based on Levi Tilleman’s “transportation network companies” idea that I wrote about in this column.

Perhaps riding sharing in large cities using autonomous EVs could reduce the cost of getting around congested mega-cities and add significant value for commuters.

Big cities are certainly feeling the pain, judging by my nightmarish experiences driving in L.A. and Vancouver. Public transit is overtaxed and poorly funded, as is infrastructure like roads and highways.

But that argument wasn’t advanced by Liebreich and McCrone. Their forecasts are based upon better and cheaper EV batteries combined with the rather suspect claim that “electric vehicles out-compete internal combustion cars in lots of important dimensions,” such as drivability and as “infotainment platforms.”

When unpacked, those forecasts just aren’t credible. Which is important as oil producers and governments struggle to come to grips with the “end of oil” scenario.

Will that scenario unfold rapidly or slowly?

The answer to that question could affect billions of dollars in oil industry investment or national and sub-national energy and climate policies.

My advice to Big Oil CEOs and policymakers is to be cautious. New technologies rarely diffuse as quickly as BNEF suggests EVs will be adopted.

Correction: It didn’t take the BNEF analysts long to point out several math errors. They weren’t material to my conclusions, but they were wrong and they have been corrected.