The week of Thanksgiving in the United States is traditional a time to recount the things for which we should give thanks. From the standpoint of the world economy certainly close to the top of the thanks list this year should be the price of crude oil, which closed last Wednesday at $43.04 per barrel, down from a high of $108 as recently as mid-2014.
The lower cost of fuel has been a boon for consumers and for most manufacturers. It has been not so favorable for oil producers and related industries. One of the other industries that would be expected to be hurt by low oil prices is the advanced battery industry and other companies working on technologies relating to light vehicle electric drive. But for several reasons that has turned out not to be the case.
While sales of light electric vehicles (i.e., HEV’s, PHEV’s, EREV’s and BEV’s) in the United States have not boomed over the past year, they have also not declined. Despite crude oil prices falling by well over 50% from 2014 to 2015, sales of light electric vehicles have remained largely static. Light electric vehicle sales in October 2015 totaled 40,310 versus 40,445 during October 2014, according to the Electric Drive Transportation Association.
Moreover, 2015 has seen major automakers double-down on electric drive technology rather than move away from it. General Motors announced that it will launch its new Bolt EV, the first 200-miles-per-charge electric car priced in the mid-range market, at the 2016 Consumer Electronics Show. Audi’s recent statement that it expects 25% of its sales to come from electric cars by 2025, was eclipsed only by Geely’s assertion that new energy vehicles will make up 90 percent of its sales by 2020. Honda, Kia and Hyundai have all announced new PHEV offerings. And consumer sentiment in a favor of electric vehicles continues to grow. The International Business Times reports that 80% of British 14-year-olds expect their first car to be electric. Automakers, who live in deep fear that an urbanized, technology savy Generation Z will fall out of love with the automobile, are paying close attention.
So what is going on? Don’t these people read the papers or the numbers on the gas pumps?
The answer is both that the price of oil doesn’t matter to consumer adoption of electrified vehicles and that it does. As for the doesn’t matter side of the argument, Tesla Motors stands as Exhibit A. In selling the Model S as the car for the technology savy (albeit the very well-off technology savy) Elon Musk tapped in to a band of consumer sentiment that was broader and deeper than many ever imagined. That same consumer sentiment drives not only car purchases but also political pressure to regulate air emissions, a critical driver of vehicle electrification.
At the NAATBatt 2016 Annual Meeting in Indian Wells, CA next March (see: http://naatbatt.org/naatbatt-annual-conference/), NAATBatt will host a panel discussion about the future of electric drive entitled “Full Electric Drive: How Big is the Niche?” The panel’s discussion will question the long-standing assumption that electric vehicles are likely to be nothing more than a very small niche within the light vehicle market for quite some time. Expected trends in vehicle regulation, vehicle design, gas prices and consumer preferences will all be examined. The panel may persuade you that many more drivers will be driving electrified vehicles much sooner than has been generally anticipated.
The price of oil matters too, of course. But it is not the price today that matters so much as what that price is likely to be in the future. Historically, the price of oil has been volatile. A recent article on CNBC’s website by Alex Rosenberg, entitled “The Surprising Case for $100 Oil”, points out that crude oil is now trading at what is known as “half cycle costs”; that is, roughly the cost of getting the oil out of the ground. Investments in exploration and land purchases are drying up. Even if the world economy and oil demand remain relatively flat, Rosenberg suggests that oil supplies will become increasingly crimped by 2017 inevitably pushing prices higher, and quite possibly sharply so.
Rosenberg also points out that at $42 per barrel, there is no longer any geopolitical risk priced into the cost of oil. Without that hedge, the impact of any actual or anticipated geopolitically-driven supply disruption will be profound. On November 24, in response to Turkey’s downing of a Russian warplane over Syria, the price of oil climbed 2.7% in one day. Higher and more volatile oil prices over the next few years are likely. In contrast, the cost of electrified light transportation is likely to remain level or fall, as advanced battery costs continue to plummet.
So the upshot is that this Thanksgiving we should be thankful for the benefits of lower oil prices. But we can and should also be thankful that, contrary to the fears and expectations of many, those lower prices will not significantly slow progress towards consumer adoption of light electric vehicles.