Electrification of the Automobile – The Challenges for the Oil & Gas Industry

Dr. Salman Ghouri[1] and Dr. Amjad Ansari

Not too long ago, only the wealthy and well to do could afford television and only handful of households were connected with the direct telephone lines (a symbol of pride). In the 1950s and 1960 television was still largely in black and white, and for international calls one had to make special arrangements with an operator. Today, following 20 years of the innovation, the cell phone has become the tool of choice not only to make calls, but also to watch videos, take pictures, receive and send written messages, follow the news, get directions (GPS), et cetera. Transportation today is on the cusp of undergoing a similar transformation.

20^th Century: Internal Combustion Engine to Internal Innovation  

If the 18^th and 19^th century were the glory days of coal, thanks to the industrial revolution, then surely the 20^th century belongs to oil. Oil was discovered in 1859, however its demand did not increase until the innovation of internal combustion engine in the early 20^th century. During the 1950s and 1960s crude oil became an essential commodity as America developed an appetite for heavy luxury cars. However, after the oil price shock of 1970s, the auto industry quickly realized the implications and challenges of higher oil prices and started manufacturing light weight and fuel efficient cars.  This era we called an era of internal innovations adjustments for the survival of auto-industry in new environment.

21^st Century: Structural Shift - Electric Cars 

At the turn of the century, the higher oil prices and global environmental challenges once again motivated the auto-industry to innovate. This time, high on the agenda is a move away from gasoline/diesel cars to electric/fuel cell cars. Also, the industry is looking at manufacturing semi and fully autonomous cars. This era we call an era of structural shift, the question regarding which is: how it will impact the oil and gas industry? 

The electric and fuel cell cars have already become a reality today, though a decade or so ago they were like a science fiction.  The technology is rapidly improving and it will be a matter of time, a few decades max, before we see most of the road transport running on electric vehicles. The question is how the penetration of EV will affect the growth of oil and gas industry? Should one expect complete displacement of petroleum based vehicles with electric cars suddenly, as in almost overnight? Or will fuel oil based vehicles continue side by side with electric vehicles until electric once becomes so cheap that the auto industry stops manufacturing fuel based vehicles? This latter, most likely scenario would mean the transition would take 3 to 4 decades, during which time the oil and gas industry will have to come up with new strategies to justify their existence.

Oil Demand in an Era of EV and Renewables

According to IEA, at the end of 2012 the transport sector accounted for over 63% of total global oil consumption of 3652 million tones of oil equivalent (mtoe). At present oil sources most of the transport sector - aviation, navigation, road and railroad traffic, and pipeline transport. One may safely assume that road transport covers 65% of the total oil consumed in transport sector (although in some developed countries this can be 70% or even higher), meaning that road transport consumes roughly 38 million barrels per day (MMBD). Out of total global oil consumption of 92 MMBD in 2014 (92*0.65*0.63=38), 63% associated with road transport.

This oil demand will be significantly reduced by the adoption of electric vehicles. And will be further reduced once the semi-autonomous and fully autonomous cars that will be shaping the 21^st century auto industry come into the market.

Another technology that could reduce oil demand from its current levels is drone. It can be foreseen, namely, that in the future electrically powered drones will be taking the role of cars in many activities, most prominently home delivery of packages and groceries.  

These change would support natural gas demand as natural gas is at present the best option for power generation (considering coals negative impact on the environment). Something to consider, however, is the fact that continuing technological advancements in renewables could make households self sufficient in energy. For example, installing solar panels on the house roof top could at one stage generate sufficient electricity to not only meet the daily electricity requirements of the household but also charge their electric cars batteries. The role of oil in the energy mix would then substantially reduce.

Conclusion

Continued innovation in the auto industry and renewable sources of energy would severely affect the global demand for oil. This reduction in global oil demand in road transport sector will be highly dependent on the penetration rate of electric vehicles and the introduction of semi and fully autonomous vehicles. This means that instead of assuming continued growth in oil demand, the oil & gas companies should perhaps prepare for a world in which oil demand is significantly reduced. In other words, just as the auto-industry is doing now, the oil and gas industry too might have to reinvent itself in order to survive the 21^st century.

Note: This article published today (Feb 5, 2016) oilvoice

[Note: I want to thank Andreas de Vries for inspiring this article and assisting its research.]

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[1] Dr. Ghouri  is an Oil & Gas advisor who advises industry leaders, investment bankers and politicians through global / regional long-term energy market forecasts, macroeconomic analysis and market assessments.