We’re probably underestimating how quickly electric vehicles will disrupt the oil market

Just about every analyst agrees that the electric vehicle market is poised for rapid growth. But how rapid?

It’s not an idle question. The rate of EV growth will have huge implications for oil markets, auto markets, and electric utilities. Yet it is maddeningly difficult to predict the future; forecasts for the EV market are all over the place.

I don’t think the wide range of projections means that we’re blind here, though — I think we can make educated guesses. Specifically, I think history justifies optimism, the belief that the high-end projections (like those in a new study I discuss below) are closer to the truth.

Let’s walk through it.

EVs could do serious damage to oil — or not much

Transportation accounts for a huge portion of US carbon emissions. As recently as 2014, it was behind the electricity sector — 26 percent of US emissions to electricity’s 30 percent. But as Vox has reported, and the US Energy Information Administration (EIA) just confirmed, as of 2016, they have crossed paths. “Electric power sector CO2 emissions,” EIA writes, “are now regularly below transportation sector CO2 emissions for the first time since the late 1970s.”

EIA

This is happening because power sector “carbon intensity” — carbon emissions per unit of energy produced — is falling, as coal is replaced with natural gas, renewables, and efficiency.

The only realistic prospect for reducing transportation sector emissions rapidly and substantially is electrification. How much market share EVs take from oil (gasoline is by far the most common use for oil in the US) will matter a great deal.

However, as Rice University’s Dan Cohan explains in The Hill, EV forecasts are all over the map.

The EIA’s "Annual Energy Outlook 2017" is much more bullish about EVs than in previous years — its forecast for the EV market is “nearly double its forecast from last year, and nearly 10 times its forecast from 2014.” It no longer thinks hybrids or plug-in hybrids will play a major role. It believes EVs are ready.

However, even with that boost, EIA has EVs at 8 percent of US market share in 2025 (it’s 1 percent today), plateauing there as US mileage standards stop falling. The other big, influential forecast, BP’s 2017 Energy Outlook, has EVs at just 6 percent of global market share by 2035.

“Overall,” BP writes, “the increase in demand for car travel from the growing middle class in emerging economies overpowers the effects of improving fuel efficiency and electrification, such that liquid fuel demand for cars rises by 4 [million barrels a day through 2040] — around a quarter of the total growth over the Outlook.”

That is … something short of revolutionary.

As Cohan notes, however, others are more optimistic:

Bloomberg New Energy Finance expects electric vehicles to represent 35 percent of new car sales globally by 2040. Greentech Media Research expects 11.4 million electric vehicles on the road in the U.S. in 2025, compared to 7.5 million in the EIA's latest Outlook.

Projections for EV growth feed into projections for oil demand. EIA, IEA, and BP expect demand for oil to continue rising into the 2040s and even beyond.

On the other hand, Michael Liebreich, the head of Bloomberg New Energy Finance, expects oil demand to peak in 2025. The CFO of Royal Dutch Shell agrees — he said the company expects it to peak within five to 15 years. The World Energy Council predicts peak demand in 2030.

Into this milieu comes a big new study that claims all those previous projections are hopelessly pessimistic.

New study says oil and coal are F’d

Today saw the release of a new study from the Grantham Institute for Imperial College London and the Carbon Tracker Initiative. It argues that solar photovoltaics (PV) and EVs together will kick fossil fuel’s ass, quickly.

“Falling costs of electric vehicle and solar technology,” they conclude, “could halt growth in global demand for oil and coal from 2020.” That would be a pretty big deal.

The “business as usual” (BAU) scenarios that typically dominate these discussions are outdated, the researchers argue. New baseline scenarios should take into account updated information on PV, EV, and battery costs. (The EIA doesn’t expect inflation-adjusted prices of EVs to fall to $30,000 until 2030, even as multiple automakers say they’ll hit that within a few years.)

And baseline scenarios should take into account the commitments made in the Paris climate agreement, they say.

(All the data and assumptions are available along with the study, and there is an interactive dashboard that allows you to fiddle around with scenario results, if you want to dig in.)

Using that new baseline produces some pretty eye-popping numbers. To wit: “EVs could make up a third of the road transport market by 2035, more than half the market by 2040, and more than two thirds of market share by 2050.”

And also: “Oil demand could be flat from 2020 to 2030 then fall steadily to 2050.”

Again, that would be a very big deal! Most big forecasters, and big energy companies, expect coal to rise at least through 2030 and oil to rise basically forever.

These new scenarios do not reflect hippie idealism, they just take seriously a) the cost curves demonstrated by PV, EVs, and batteries so far, and b) what countries said they would do in Paris. They assume that all this talk about climate change is not a bunch of BS — that it’s a real problem and we’re really going to try to solve it. (Admittedly, Trump has complicated that picture, but he can’t stop the rest of the world.)

If these forecasts play out, fossil fuels could lose 10 percent market share to PV and EVs within a decade. A 10 percent loss in market share was enough to send the US coal industry spiraling, enough to cause Europe’s utilities to hemorrhage money. It could seriously disrupt life for the oil majors. “Growth in EVs alone could lead to 2 million barrels of oil per day being displaced by 2025,” the study says, “the same volume that caused the oil price collapse in 2014-15.”

Yet, according to the study’s authors, virtually none of big fossil fuel companies are taking the possibility seriously, or planning for it.

Javier Zarracina/Vox

Taking optimism seriously

So EV forecasts range from modest to revolutionary. What should we make of this?

It seems to me that we don’t come to these questions with a clean slate. The very kind of models this study critiques are the ones that have consistently underestimated the growth of solar and wind. They use baseline scenarios that assume no further cost and policy changes when, in reality, cost and policy changes are both rapid and inevitable.

Multiple drivers (pardon the pun) are lining up behind EVs — rapidly falling battery costs, rising range, synergy with other new energy technologies, widespread international policy support, growing consumer interest, and (my pet dark horse) wireless EV charging.

Experience shows that markets at the center of this kind of interest and activity do not continue to grow on a steady, linear path. They take off, lurching into exponential growth. That shift is impossible to predict in advance with any precision, but at this point, we ought to know that it’s coming.

By now, we need not be neutral toward this range of projections. History has taught us that for new, distributed, consumer-focused technologies, unexpected explosive growth is … to be expected. Big oil companies and investors would do well to prepare.

Watch: A visual tour of the world's CO2 emissions

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