How widespread adoption of electric vehicles will impact the oil sector
Autonomous cars are the consumer product of the hour, attracting big tech companies and regular automakers alike. Tesla Motors just revealed that all models would now come with full autopilot capabilities, and various other names have announced that they’re developing driverless cars. Amongst all the hype around self-driving cars, it’s often easy to forget that the vehicles of the future won’t just be autonomous – they’ll be electric. These cars will be more environmentally friendly and cheaper to run than their traditional counterparts, causing less air and noise pollution. It’s not good news for everybody, though. In a report exploring the future of fossil fuels in a world run by electricity, Fitch Ratings suggest that electric cars pose a ‘serious threat’ to the oil industry. Transport that runs on electricity obviously won’t need to be fuelled by oil, so rising adoption rates will pose a real problem for stakeholders and shareholders alike. How far away is the mass adoption of electric cars, and could they destroy the oil industry?
It has recently been argued that electric cars will only really impact the oil industry once they become a successful consumer product, which means they’ll need to be financially attainable for a large proportion of people. Whilst that might be true, Tesla Motors has already been churning out electric cars with affordable price tags. They’re not exactly struggling to attract customers – the new Model 3 has already had nearly 400,000 pre-orders. However, according to OPEC (Organization of the Petroleum Exporting Countries), electric vehicles will only make up 1% of the world’s cars by 2040. . . This sounds like oil giants will have to wait a while for the threat to become reality, but focusing on the numbers fails to consider human reactions. One of the most worrying things for the oil industry is that electric vehicles don’t even need to take off on a mass scale to have a serious effect. They only need to become popular enough to create a lack of confidence in investors. Oil has often been comparable to gold dust, although in 2014 a slight lack of demand caused huge depression in the industry. It doesn’t seem to take much to create fluctuations in oil prices, which doesn’t bode well for profit. A gradual social shift towards sustainability is also going to threaten companies that make their money from oil, as consumers begin to actively search for alternatives.
What disruption will this cause?
An industry that relies on a finite source was never going to last forever, and it is innovation like electric transport that will accelerate this. Even if electric cars only become half as popular as has been predicted, they’ll still present a very real challenge to established oil companies – but does this mean that the industry will simply disappear? In short, no. Developing countries will still choose oil because their infrastructures will demand it. Even in the U.S. and other so-called ‘developed’ countries, there will still be a place for oil in the domestic setting to heat homes. As well as this, the focus for electric vehicles lies heavily upon cars. Aircraft and ships both use various types of oil, including petrol and diesel. It’s bound to be a while before developers reveal market-ready, electric ships and passenger aircraft, especially when electric cars are still something of a novelty. Despite this, electric vehicles will help to hammer nails into the industry’s coffin, removing or at the very least reducing the power of oil. The adoption of electric cars will clearly have economic consequences, but there’s a much bigger picture to consider. Much of foreign relations has been based on who has fossil fuels, and taking away their influence could potentially disrupt entire international hierarchies.
From a business perspective. . .
By now, it’s obvious that the oil industry can’t go on forever, this is something that people have been aware of for some considerable time. Electric cars and the wider switch to renewable energy are making it happen sooner. From the perspective of an oil firm, this is nothing short of nerve-wracking. How should the big fossil fuel companies respond? To stay ahead in the energy sector, they’ll need to branch out into renewable energy sources. One way to do this would be acquiring promising startups, which then provide a new opportunity for the young companies looking for support and equips the parent company with the personnel they need to remain relevant. For other energy utilities that rely on fossil fuels, threats to the oil industry serve as a warning that the market is changing. This change has been enabled by innovation and supported by an increasingly environmentally-conscious population.
Ultimately, the development of electric cars will contribute to the gradual demise of the oil industry, taking away the main use for oil by replacing engines with electric motors. It’s true that electric vehicles will need to experience rising adoption rates, as at the moment they don’t even amount to 1% of the world’s cars. However, electric transportation only needs to expand to the point where it looks as if it could pose a threat, and this will knock the confidence of those who hold a stake in the industry and potentially lead to financial depression. It’s also possible that commentators are underestimating the popularity of electric vehicles. Bloomberg Business has predicted that by 2040, 50% of new cars will be electric, which is decidedly more generous than OPEC’s 1%. Whilst oil will still be used in other forms of transportation and to heat homes, the finite fuel will eventually be replaced by renewables across all applications – and the automotive sector looks to be the first.
Will electric vehicles achieve the necessary adoption rates to challenge the oil industry? What barriers are there to mass adoption of electric cars? How will depression in the oil industry effect international relations? Share your thoughts and opinions.