Why the oil slump won’t pull the plug on electric-vehicle sales

Oil’s decline is largely irrelevant to the transition to clean energy.

24 Mar 2020

5 Minutes

Authored by Graeme Baker, Portfolio Manager & Deirdre Cooper, Portfolio Manager

24 March 2020

Oil’s decline is largely irrelevant to the transition to clean energy.

Oil’s precipitous decline has sparked the usual arguments about the commercial viability of renewable and low-carbon technologies. The debate highlights some common misunderstandings about what is driving the transition to cleaner energy. 

Foremost among them is the notion that changes in fossil-fuel prices are a major influence on the energy mix. They aren’t. Oil is not typically used to generate electricity, so the fact that it now costs less is irrelevant to most power producers. And, in many parts of the world, renewables are so much cheaper than coal and gas that the fossil fuels aren’t close to being competitive. 

Even in sectors that currently depend on oil, the crude price is rarely the main determinant of the speed of the energy transition. Take transport. Cheaper oil will not derail the move towards electrified vehicles, any more than a 25% gain for the black stuff would have accelerated it much. Why not? Because the oil price does not drive most electric vehicle (EV) markets. 

That’s partly because the cost of oil has a limited impact on fuel-pump prices. This is especially true in Europe, where taxes account for the lion’s share of the cost of a litre of fuel (typically more than 60%). Retailers’ margins, refining costs and other expenses represent another large slice, with crude prices making up the slim remainder. 

Chinese motorists are also unlikely to feel the full effect of oil’s recent slide at the filling station. That’s because the authorities put a floor under the retail price of fuel, aligned with a crude price of about US$40 per barrel (bl). At the time of writing, Brent is trading at around US$25/bl. 

The cost of oil has a bigger influence on gasoline prices in the US, where fuel taxes are lower. However, the US electric car market is tiny. Even if cheaper fuel were to deter some US car buyers from going electric, the effect on global EV sales would be negligible. 

The second error is to assume that the price of fuel – and, by extension, the total cost of owning an EV versus a traditional vehicle — is a major driver of consumer choice in the auto sector. At the luxury end of the passenger-vehicle market, total ownership costs are rarely a consideration. Does anybody choose a US$100,000 Tesla because they can save US$1,000 a year on fuel? Performance and brand — and the associated status and lifestyle considerations — matter much more.  
Neither is total cost of ownership a key determinant of mass-market car sales. EV automakers have been finding it extremely difficult to get retail buyers to look beyond sticker prices — which is why the latest mass-market EVs are being priced much closer to comparable internal-combustion-engine models. 
The markets for delivery trucks and buses are different. The commercial and public-authority buyers of these vehicles give more weight to total costs. However, regulation — fuelled by mounting concern over pollution and carbon emissions — and changing values (or, more cynically, the desires of companies and civic leaders to flaunt their green credentials) are becoming more influential on bus and truck sales as well. It is unlikely that Amazon or Transport for London will abandon plans to electrify their fleets because fossil fuels just got cheaper. 

Regionally, the picture is similarly nuanced. In Europe, regulation is by far the most important driver of EV sales growth, especially since the EU this year began requiring car makers to reduce average CO2 emissions across their ranges to 95g/km. EV sales will be crucial in meeting this fleet-level target, strongly motivating car makers to incentivise retail and fleet customers to switch to battery-powered automobiles. 
Regulation plays an important role in vehicle choice in China, too. To control congestion, many big cities operate registration-plate quotas, with tighter limits (relative to demand) for traditional cars. The more-than 3 million Beijing residents participating in the city’s traditional-car plate lottery reportedly face a 2000-1 chance of winning. Even if cities answer Chinese authorities’ recent call to issue more plates to revive the flagging national auto sector, the probability of obtaining a licence for a traditional car will likely remain vanishingly small.  

Oil’s steep decline will have the biggest influence on the economics of EV versus traditional-car ownership in the US. But given that high-end automaker Tesla dominates the US electric car market, few of its necessarily wealthy customers are likely to care much that already-cheap gasoline costs less.  

Which is not to say that EV makers do not face serious challenges, including the risk of backing the wrong technologies and the inadequate charging infrastructure in most countries — not to mention the impact of the coronavirus (COVID-19) on overall car sales. But falling petrol and diesel prices are not among them.  

After a torrid 2019, the medium-term prospects for the EV value chain – from battery makers to car distributors – are brightening as regulation and mounting climate concern, along with a rapidly widening choice of electric models, increase the appeal of EVs for more consumers. Cheaper oil may slightly delay sales growth in some of the smaller EV segments, but it’s no more than a sideshow for the EV sector overall. 

There could even be a twist in the tail. I wouldn’t be surprised if the stimulus programmes to combat the coronavirus and the oil slump emphasise clean technologies, particularly outside the US. If that happens, the recent market falls may ultimately turn out to be a boon for EV adoption.
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