I have been discussing the double climate risk faced by the Texas Gulf Coast over the last year. Physical climate risk due to extreme weather and economic risk because of a decarbonizing economy. This week, the economic risk became more apparent. In BP’s latest energy report, we see a decarbonizing global economy, with the adoption of electric vehicles (EVs) being one of the areas that may pose the greatest risk.
The EV Transition
Currently, 70% of total crude in the US goes to gasoline and diesel sales. With most of the major auto
companies pledging to have all EV vehicles or at least multiple EV cars available in the next few years, it is expected that demand for crude oil could be peaking more quickly than expected. Some examples of automaker pledges include General Motors having 25 EV models available by 2023; Toyota will offer EV model options for all vehicles in its fleet by 2025; Daimler and BMW anticipate 15% of vehicle sales by 2025 will be EV; Ford is investing $4.5 billion in EV’s; Volkswagen plans on having 30 models by 2025 and anticipate 25% of sales will be EV’s; Volvo announced all vehicles sold after 2019 will be EV’s or hybrids. Everyone knows what Tesla is up to. So, we see now not just high end, luxury segment going EV, we see cars being introduced to the wider public at more acceptable price points.
The automakers are not doing this because they necessarily care about the impact of their vehicle’s emissions on climate change. Much of these announcements are being driven by governments who care about climate change and are trying to meet their Paris Climate Accord agreements. A good way to reach these goals is to decarbonize their domestic fleets. To name a few, India, England, the Netherlands, France, Germany and Scotland have all made announcements to end sales of diesel and gas-fueled vehicles in the next 20 years. China has also made a pledge to decarbonize its fleet, but has yet to set a firm date. Although the United States Federal Government is not taking the climate threat seriously, the rest of the world is and that will have a significant impact on the US economy, particularly the part of the economy that produces the oil and gas.
Oil Projections Largely Slowing for Transportation Fuel Use
Projections vary considerably as to the rate at which EVs will be adopted. ExxonMobil and the DOE’s Energy Information Administration anticipate fairly low and slow EV sales. However, both anticipate that overall growth of consumption will increase at a slower rate, not peak. This is due to significant growth of vehicle purchases in developing countries, such as China and India, combined with increasing fuel efficiency of vehicles.
BP, Statoil, Morgan Stanley, Wood Mackenzie and Bloomberg New Energy Finance all anticipate more robust demand growth for EVs. For example, Wood Mackenzie anticipates a net decrease in oil consumption by up to two million barrels per day by 2035 due to EV sales. BP anticipates significantly slower growth of transport fuels out to 2040.
BP finds that during the last 25 years fuel demand increased by 80%. According to their new report, which assumes an “evolving transition” the next 20+ plus years will see significantly lower growth of 25%. Evolving transition is the assumption that technology, social preferences, and policies continue to evolve at the same rate as the present. In this scenario, the outcome is that due to EVs and efficiency gains, the amount of fuel consumed in 2017 will be about the same in 2040.
BP goes a step further and runs some models that consider a globe that bans internal combustion engines. We have already started seeing this in some countries. In this alternative scenario, we see that by 2040 all car sales will be EV and about 66% of total vehicle miles traveled will be with an EV. This is about double what would be anticipated in the evolving transition scenario.
The fact of the matter is that the oil industry may be at risk with this transition, and more importantly the livelihood and communities of the Upper Gulf Coast. Maybe some of this risk will be mitigated by the increased use of natural gas to fuel the additional power plants needed to charge all of the new EVs.
Barriers and Opportunities
There are major hurdles to significant demand growth in the deployment of EVs. The upfront cost of EVs remains higher than gasoline and diesel powered vehicles. Further, the charging infrastructure is not wide-spread enough to adequately power up a large EV fleet. There is also the problem, that like myself, a good portion of the population holds on to their vehicles for about 10 years.
That being said, the largest cost to EVs, battery prices are coming down very quickly and continue to decrease. The cost in 2010 was $1,000 per kWh. Today the prices is $209 per kWh with an anticipated cost of $100 kWh by 2025. Which according to Bloomberg New Energy Finance could be the tipping point for EVs. Also, there is a very large push to build out a more robust EV charging infrastructure. A lot of this new infrastructure may occur with the Volkswagen Diesel Emissions settlement. There is a discussion of approximately 2,800 stations being installed with the settlement funds.
The likelihood of these dire scenarios coming true is largely driven by the cost of EVs and the availability of charging infrastructure to conveniently recharge these vehicles in and out of town. The growing demand to decarbonize our lives and subsequent policy and market changes will also have a material impact.
Gulf Coast leaders should not take a wait and see approach. It is great that the region is coming out of its latest oil induced hangover. The problem is that you can tell a lot of our leadership is feeling pretty fat and happy again. We are again becoming complacent and less willing to take the steps to diversify the economy. We have a long history of falling back into business as usual as the oil and gas sector booms. After multiple crashes, why else would you still have a regional economy that is still largely fueled by the oil and gas industry? The region can’t afford to become complacent. It should seize the movement to decarbonize and use our engineering and science expertise to our advantage. There is no reason the region should not be leading the clean energy economy. Unfortunately, to our detriment, there does not seem to be a lot of desire to lead us in this direction. This is a problem. If the Amazon snub should tell us anything, it is that there may not be a lot of faith from outside business that the Gulf Coast can learn new tricks. Maybe they are right.