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Electric vehicles will have huge ramifications for oil prices

This article first appeared in the Energy and Carbon Blog

A little over a hundred years ago, at the start of the 20 century, electric vehicles (EVs) actually outsold combustion engined cars. They had many advantages. They were quieter. They did not smell. They made no vibrations. They were easy to start and here was no need for a hand crank to start the car, which was a particularly difficult and cumbersome task for most people.

The first nail in the coffin of the electric vehicle was the invention of the electric starter motor and its use with combustion engine vehicles from 1912 onwards. The second was Henry Ford. Despite his wife insistence on driving an electric vehicle, Ford pushed ahead with his decision to mass-produce the internal combustion engined automobile. His mass production techniques pushed costs down at amazing speed and made the car affordable to ordinary Americans. Add to that the longer driving range of the combustion engined vehicle and unsurprisingly by 1920 the electric car manufacturers were all out of business, and with it began a 100 year old love affair between the oil and automobile industry.

Here we are are 100 years later and I am considering buying an electric car which like those first ones is still being powered by batteries. And the big question will it be different this time? Will the electric car win over this time?

A quick look at the Tesla share price with it market capitalization of $27bn being almost the same as the combined values of Fiat, Peugeot and Renault together tells you that financial markets certainly think so. Drive the Tesla Model S and you will probably think the same. The torque in this electric vehicle is nothing short of sensational, and the range of the car is up to 480km without recharging. And it is selling exceptionally well. In 2013, it was the best-selling automobile in Norway and it was also the best selling luxury car in the US overtaking BMW, Audi, and Mercedes’ flagship automobiles. However, I am not looking at buying a Tesla. I am looking at buying a BMW i3.

I am doing so because I think the i3 is a truly amazing car and I firmly believe it will do to electric vehicles what the Toyota Prius did to hybrids. BMW have started from scratch with i3 and have created with it the world’s first mass produced automobile to use carbon fiber reinforced plastic throughout the vehicle. This high-tech material is around 50% lighter than steel components and allows BMW to reduce the weight of the car (incl. batteries) to the weight of a similar sized combustion engine car.

With the launch of the i series, BMW is not only showing strong leadership and a good sense of timing in launching a new brand for electric cars, but also launching a “test bed” which will allow the company to put in place radical new manufacturing methods, enter the electric vehicle race as well as test new services. The latter is very important because if electric cars do take off then many of the incumbent manufacturers will come under significant profit margin pressure. As it now stands circa 10-15% of total industry profitability comes from after sales services including the sale of spare parts. The issue with EVs and in particular the i3 is that it has a much simpler design with fewer components, which translates into lower maintenance needs and lower spending on replacement parts. The big question is whether the industry can offset these falls in margins by new activities such as car sharing and re-charging. This is what BMW is attempting to do with the i-series and projects such as the Drive Now car sharing program. In addition, BMW offers an extensive range of services for i3 which they label, their 360° ELECTRIC package. This includes the installation of the BMW i Wallbox in the customer’s garage, a renewable energy supply offer, to the charging card for user-friendly access to the public charging infrastructure and additional driver assistance services from BMW ConnectedDrive.

Besides learning about the future BMW is also selling lots of i3s, some 8,401 units in the first eight months of the year. Whatsmore the i3 is already outselling Tesla in North America. In August BMW sold sold 1,025 i3s in North American as opposed to 600 Model S’s. And things are probably going to get better for BMW given that the total cost of ownership of a BMW i3 in its home market Germany (over a three year period) is very similar to that of say the BMW X1. In addition, with battery costs likely to fall by 50% over the next few years plus carbon fiber costs according to BMW to fall to the aluminum production levels by 2020 it will not be long before the costs of an electric car are lower than a traditional combustion engined car. And we are only at the start of development of electric vehicles with lots of promise in terms of cost reductions and new business models. And what this all mean?

The electric car will come faster than we all think. Only time will tell whether it will it will beat the combustion engine into oblivion but even if it doesn’t its increasing penetration will not only change the whole automobile industry but also the oil industry. The numbers are simple. Europe and the U.S use 15m barrels of oil per day for passenger cars. If 20% of those care were to go electric that is the equivalent in production terms of major global producers such as Iran or Iraq. Add to that the rest of the OECD and fast growing countries like China and you can see that increasing electric vehicle penetration will have a massive impact on the oil price. And eventually thequestion may move from how oil prices impact electric vehicle sales to how electric vehicle sales impact the oil price.

This article first appeared in the Energy and Carbon Blog