The Times, July 31 2017,
Oil investors are getting worried. Electric cars have accelerated on to the front pages. Sales are surging, carmakers are unveiling plans for all-electric models and this week Britain vowed to ban sales of petrol and diesel cars by 2040.
Yet if Big Oil believes that death is about to pull up in a Tesla, it’s doing a good job of hiding it. On Thursday, Ben van Beurden, the boss of Royal Dutch Shell, welcomed Britain’s plans and declared that his next car would be electric. And earlier in the year Spencer Dale, BP’s chief economist, bluntly described the arrival of electric vehicles on the oil majors’ lawn as “not a game-changer”, adding that not even “enormous” growth in sales of such vehicles would make a big dent in global oil demand.
That’s partly because the world needs oil for much more than just cars. BP reckons that fuel for passenger vehicles accounts for about a fifth of the 95 million barrels consumed globally every day. Most of the rest is used in industry, plastics manufacturing or to fuel heavy goods vehicles, aircraft and ships. Such sectors do not have easy non-oil alternatives and companies believe that some, especially petrochemicals, will keep growing strongly for decades.
Oil companies also believe that the substantial fuel demand for cars won’t disappear overnight, whatever the growth in electric vehicles sales. “You have still got a big [existing] car fleet that is going to be on traditional fossil fuels for quite some time,” Lydia Rainforth, an oil analyst at Barclays, said.
Then there is basic geography. In emerging economies, petrol sales are expected to continue rising because, in Mr van Beurden’s estimation, these countries “cannot simply make that switch [to electric vehicles] because they do not have the electrical infrastructure to do so and do not have the wealth to do so”. Indeed, while BP estimates that there will be 100 million electric cars on the road by 2035, up from two million today, this will equate to only about 6 per cent of an enlarged global fleet, dampening global oil demand by just 1.5 million barrels a day.
To some, perhaps inevitably, that seems optimistic, at best. Bloomberg New Energy Finance forecasts that steep battery cost reductions will make electric vehicles cheaper than their traditional internal combustion engine peers by late next decade and expects 530 million of them on the road by 2040, a third of all cars.
That could destroy eight million barrels a day of oil demand, with “very strong implications for refiners”, Colin McKerracher, BNEF head of advanced transport, said. “It is safe to say this would have a negative impact on the oil companies.”
Even this bullish forecast assumes that only 80 per cent of UK car sales will be electric by 2040. Britain’s new policy was significant because it pointed to even faster progress, Mr McKerracher said, with the government intent on pushing this “even further and faster than the economics alone would”. Crucially, “it isn’t just the UK doing this”, with France announcing similar plans last month and China and India also looking at targets.
“We could be wrong,” Bob Dudley, BP’s chief executive, admitted to shareholders at its annual meeting in May. But no matter. “We have a very resilient portfolio,” Mr Dudley added. “We can shift our activities as a company.”
Mr van Beurden makes the same case. In the most aggressive scenarios, oil demand could peak as soon as the late 2020s, he said this week. “Is that an issue for us? We have to adapt to it.
“Every year we invest between $25 billion and $30 billion. We are a $280 billion company, so every decade we build a new Shell all over again. We are not some sort of sitting duck that has nowhere to go with only one business model or only one asset base. We continuously reinvent ourselves.”
When peak oil demand will occur may be a matter for debate, he said, but “that it will happen we are certain”.
“The idea that they are energy companies rather than oil companies will be very much the mantra from all of them,” Ms Rainforth said.
Shell and BP have already increased their focus on cleaner-burning gas. They have also started to develop renewable energy businesses to tap into rising global power demand.
And they are finding ways to capitalise on the rise of electric vehicles. Shell is already preparing to install charging points at its service stations around Britain, which it says represents an opportunity to sell drivers more products at its convenience stores while they wait.
As Big Oil evolves into Big Energy, the sight of Mr van Beurden behind the wheel of an electric vehicle might not seem so crazy, so long as he’s charging it up on a Shell forecourt.
Cost of batteries will decide the future of petrol and diesel
Analysts differ wildly in their forecasts for the future growth of electric vehicles, but they seem to agree at least on why.
“It all depends on what you believe will be the rate of decline of battery costs,” Alan Gelder, a senior vice-president at Wood Mackenzie, said.
The oil consultancy expects relatively modest growth in electric cars, which it believes will account for only one in three British vehicle sales by 2035. That is far below Bloomberg New Energy Finance’s estimate of 80 per cent by 2040, let alone the UK’s plan to end petrol and diesel sales by that year. Bloomberg says that battery costs have fallen by 73 per cent since 2010 and it expects improved energy density and increased scale in manufacturing to drive further cost reduction. Yet Mr Gelder questioned whether costs could keep coming down, given the huge requirement for lithium and cobalt. “It’s hard for that to increase in scale significantly and still become cheaper,” he said.
Colin McKerracher, of Bloomberg, believes that this risk is overplayed. “Today, if lithium prices went up 300 per cent, that would increase the cost of a battery pack about 2 per cent,” he said.