How Will Electric Cars Impact the Oil Industry?
It’s tough to constantly research disruptive technologies and not invest in some of the great stories we come across. Some themes such as gene editing seem like no-brainers to invest in, but then some company pulls a Bind Therapeutics and suddenly your investment evaporates before your eyes. That’s why the majority of our personal investment dollars are allocated towards a Dividend Growth Investing (DGI) strategy, one that will withstand the test of time. As the stock market gets pummeled squarely into bear territory, we’re sleeping well at night. What we’re more concerned about are any disruptive changes that may be taking place in any given industry that will result in one of our DGI stocks pulling a Kodak:
Kodak is a company that had a cash cow selling film at +80% profit margins, had the fourth most valuable brand in the world in 1996, and actually invented the digital camera back in 1975, yet they still couldn’t manage to survive, ultimately filing for bankruptcy in 2012. Kodak is not the last company that will implode due to disruptive technologies, and we always want to be checking our portfolio to make sure every company we own is pivoting towards technological change. Examples we’ve looked at before include Coca-Cola’s use of AI, or Walmart’s use of robotics. Now, we want to look at how electric cars will impact the oil industry.
Do Electric Cars Use Oil?
Turns out a fair number of people ask Google “do electric cars use oil?” While that might sound like a dumb question to ask, when you think about it, the answer is not so black and white. Electric cars have moving parts, and moving parts require lubricants. Electric cars have transmissions, and transmissions use oil. Electric cars use plastic, and plastic requires oil as an input. There are dozens of ways an electric car might use oil, and it’s a good example of how pervasive oil is in everything we see around us. That’s why the first thing of interest we need to look at is just how oil is being used today around the globe. Around half of all oil being used is for vehicles that you see on the road:
So, we might conclude that if all vehicles on the road were electric, we could cut the demand for oil in half. Sounds simple, but as we mentioned in our earlier example of how electric cars might use oil, it’s not nearly that simple.
In order to try and forecast the demand for oil, we corralled together a small group of our brightest MBAs to dig deep into all the data and look at every single data point out there, taking into account things like geopolitical uncertainties, the rise of renewables, and global population growth forecasts. Then we realized that someone else already did it for us.
Forecasting The Demand For Oil
Just over a year ago, the International Energy Agency published a fascinating report titled World Energy Outlook 2017. With the amount of inane drivel that counts as news these days, it’s highly unlikely any people took notice when this report was made available in November of 2017, and what a fascinating picture it paints of what our energy future might look like. For starters, global energy needs will expand by 30% between 2017 and 2040 which is the equivalent of adding another China and India to today’s global demand:
The first key takeaway here is that it doesn’t matter how many Teslas you see buzzing around the streets of San Francisco, what really matters is what happens around the globe. However, notice that they’ve said “energy,” not “oil.” What we’re interested in here is the oil component of energy, and for that they say that “oil demand continues to grow to 2040, albeit at a steadily decreasing pace.” What’s interesting to note is that by 2030, China will overtake the United States as the largest consumer of oil with net imports reaching 13 million barrels per day (the U.S. consumes about 20 million barrels of oil a day, a number that represents about a fifth of global demand.) That’s taking into account the fact that by 2040, one-in-four cars in China will be electric.
How Electric Cars Will Impact the Oil Industry
The final verdict reads, “although efficiency and rising electrification bring a peak in oil used for passenger cars, but other sectors – namely petrochemicals, trucks, aviation, and shipping – drive up oil demand to 105 million barrels a day by 2040.”
In order for oil demand to change, it’s going to take more than just electrifying vehicles. The report goes on to say:
Even with a rapid transformation of the passenger car fleet, reaching a peak in global demand would require stronger policy action in other sectors. Otherwise, in a lower oil price world, consumers have few economic incentives to make the switch away from oil or to use it more efficiently.
While we may be tempted to think that we can affect the demand for petrochemicals by doing things like recycling, it’s just too big of a market. According to the IEA, even if global recycling rates for plastics were to double, this would cut only around 1.5 million barrels per day from the projected increase of more than 5 million barrels per day.
While we can try to do back-of-the-napkin calculations to figure out whether or not electric cars will affect the demand for oil, we’re going to put our trust in a 240-person agency, staffed with energy analysts, modelers, data managers and statisticians, that has concluded that we should not expect to see the overall demand for oil impacted by electric cars for the foreseeable future. When it comes to global energy demand as a whole, 40% of that demand is being met by renewables. The report also considers “improvements in efficiencies,” without which the global demand for energy would more than double as opposed to the forecasted 30% increase.
Overall, the report paints a rosy outlook for the oil industry, but that doesn’t take into account supply-side variables that may affect the price of oil. Not to mention, the price of oil is what keeps those dividends flowing. That’s why we’re looking to the management teams at companies like Exxon and Chevron to keep up those clever financial engineering tricks that have enabled these companies to increase their dividends for 36 and 31 years in a row respectively. Let’s hope it stays that way for many more years to come.