Amongst auto industry insiders and experts there is a consensus that the future of transportation will be radically different from what it is today.
Given the fact that some two-thirds of crude oil demand is linked to transportation, one would expect the oil industry to pay close attention. Very little of that seems to be happening, though. ExxonMobil’s most recent energy outlook, for example, assumes that the auto industry will largely stay the same at least until 2040. Similarly, Chevron has indicated that it plans on the basis of the assumption that the changes underway in the auto industry will not have a meaningful impact on the oil industry for at least another 50 years.
To evaluate which expectation is most likely right, one needs to review the reasons behind investments in research around car connectivity, electric vehicles, fuel cell vehicles and autonomous driving. We explore the question: Are these expressions of a Second Automotive Revolution, or not? And if so, what does it mean for global oil markets.
The trends behind the Second Automotive Revolution
ExxonMobil’s most recent energy outlook, for example, assumes that the auto industry will largely stay the same at least until 2040. Similarly, Chevron has indicated that it plans on the basis of the assumption that the changes underway in the auto industry will not have a meaningful impact on the oil industry for at least another 50 years.
Over the last 60 years the world has changed greatly, but without forcing any dramatic shifts in cars and personal mobility. The increasing demand for transportation has been met by more and better conventional vehicles, rather than radically new forms of transportation. The adoption and tightening of emission control regulation around the world makes it impossible for this state of affairs to continue.
In addition, technological innovations are changing the transportation need that the auto industry caters to.
The internet, for example, is radically changing the way people interact (Facebook), learn (Google), do business (Alibaba), relax (Netflix) and spend (Amazon). Other areas that are presently on the cusp of being disrupted by technology are banking and healthcare. What all these digitization trends have in common is that they will reduce the need for people to travel, likely decreasing the need for road transport.
At the same time, car hailing and sharing services such as Uber and Lyft are changing the way people ensure access to cars. Essentially, these services provide easy and affordable access to fit-for-purpose vehicles, on demand, almost instantly. Continued progress in this area would further reduce the need for people to own a car in the future, while increasing the average utilization rate of cars.
The trends towards greater urbanization is also making car ownership less desirable. At present, 54 percent of the world’s population lives in urban areas. Air pollution, road congestion and limited availability of car parking spaces are already common issues for urbanites, meaning that continued urbanization will make these issues more pronounced.
The focus of the Second Automotive Revolution
The auto industry realizes that the world in which it operates will be fundamentally different in the future, and thus that the car of the future will also need to be very different. It is not entirely clear at this stage exactly what the car of the future will look like, but current research does indicate the direction of the change.
Electric vehicles can thus lower the cost of road transportation, while at the same time providing a more enjoyable driving experience, offering smoother and more powerful acceleration, while being almost completely silent.
One focus area for research is the development of plug-in electric vehicles and fuel cell electric vehicles (which couple a hydrogen based electricity generation capability to an electric motor). This caters to the Millennials stated preference for renewable energy solutions since electric vehicles do not emit any tailpipe pollutants. Electric vehicles also have further advantages over traditional internal combustion engine powered vehicles, such as greater efficiency, as they convert some 60 percent of energy to power at the wheels compared to around 20 percent in the case of internal combustion engine powered vehicles, and better reliability and durability while requiring less maintenance since they have fewer moving parts. Electric vehicles can thus lower the cost of road transportation, while at the same time providing a more enjoyable driving experience, offering smoother and more powerful acceleration while being almost completely silent (which is why the sports car manufacturer Aston Martin sees a great future in electric vehicles).
That is not to say that there are no drawbacks attached to electric vehicles at present. For example, they tend to be more expensive and their driving range remains limited. But these obstacles are exactly what the Second Automotive Revolution is working to overcome.
Another focus of the Second Automotive Revolution is development of self-driving cars, or autonomous vehicles. Most people see the act of driving as a necessary waste of time and would rather spend that time doing something else—a reality that self-driving cars would make possible. Autonomous driving would also be a necessary adaptation of the car for the megacities of the future. It would solve the parking problem of cities as self-driving cars do not have to park in the city—after drop-off they can drive anywhere for maintenance and refuelling. It would also reduce road congestion since self-driving cars improve the flow of traffic, drive more safely thus reducing the number of congestion-causing accidents, and require less distance between them for safe driving so more of them could fit onto any given stretch of road. Since traffic jams are a major cause of air pollution, autonomous driving would also help clear up the city skies. Additionally, an estimated 30 to 60 percent of cars driving in the inner city are simply looking for parking—autonomous vehicles would lift this burden, supporting both congestion and air pollution improvements in the process.
The implications of the Second Automotive Revolution for the oil industry
The auto industry’s shift towards autonomous driving is effectively reinforcing its shift towards electric vehicles. Today’s cars tend to stand idle more than 94 percent of the time. Self-driving cars, however, would be on the road almost full-time. This means that reliability and durability will become of critical importance for the cars of the future, which gives the electric engines a major advantage over internal combustion engine.
Amongst electric vehicles, meanwhile, the plug-ins will have an advantage over fuel cells since the latter, in essence, is just a plug-in with fuel cell technology added on top to increase range. This means that fuel cells are inherently more complex than plug-ins and thus less reliable and durable.
The Second Automotive Revolution is therefore leading to a shift from the internal combustion engine to the plug-in electric motor. And by extension, to a shift in the energy mix, away from crude oil towards gas and coal since these are dominant in the electric power generation industry.
The Second Automotive Revolution is therefore leading to a shift from the internal combustion engine to the plug-in electric motor.
This shift will not be one-for-one, however, as self-driving electric cars will improve the overall energy efficiency of transportation. Their smoother driving will reduce fuel consumption per trip, as will their impact on flow of traffic and road congestion. Also, their enhanced safety will allow the auto industry to use materials lighter than aluminum, iron and steel, and thus reduce the weight of the car. The decrease in crude oil demand will therefore be only partially offset by an increase in gas and coal demand.
The size of this offset will, to a great extent, depend on the adoption of renewables for power generation. In this regard it is important to note that in 2015 renewable energy made up 68 percent of all investment in new capacity in the US. The year before, in 2014, renewable energy accounted for close to 50 percent of all new power investments globally. It is not unlikely, therefore, that once self-driving electric cars start having a real presence on the roads (which some argue will require 20 years at least) only very little of the resulting decrease in crude oil demand will translate into higher gas and coal demand.
The timing of the Second Automotive Revolution has implications for the oil Industry
Currently, fully electric new vehicle offerings remain limited. However, essentially all the major car companies have indicated plans to aggressively expand in this area between now and 2020. This includes the German manufacturers BMW, Mercedes and the Volkswagen Group, Ford, General Motors, Volvo and Honda.
It is reasonable to expect, therefore, that starting 2020 consumers will be able to choose between conventional internal combustion powered vehicles, hybrids and full electric vehicles in every class of cars—SUVs, sedans, vans and even sportscars.
Within this timeline, plug-in electric vehicles should be close to cost competitive. So far, their rate of improvement has outpaced expectations. For example, the cost of producing battery packs for electric vehicles is already below earlier cost projections for the year 2020. And as the industry’s familiarity with electric vehicles grows, the rate of improvement in electric technologies should be expected to increase.
Based on all this we foresee electric vehicles to become the preferred transportation option sometime between 2020 and 2030. If this is indeed achieved, the share of electric vehicles in the motor pool will expand dramatically during the 2030s. According to our calculations, a 10 percent share for electric vehicles in the U.S. alone would easily remove more than 1 millions barrels from crude oil demand. Consequently, the changes currently underway in the auto industry should be expected to dramatically impact the oil industry well before 2040.
Andreas de Vries is a strategy consultant in the oil and gas industry.
Dr. Salman Ghouri is an oil and gas industry advisor with expertise in long-term forecasting, macroeconomic analysis and market assessments.