Big oil’s electric problem

Big oil’s electric problem
As demand of electric cars steadily grows, oil companies across the world have started contemplating on their future. Will this cause a significant impact on the still-profitable..

As demand of electric cars steadily grows, oil companies across the world have started contemplating on their future.

Will this cause a significant impact on the still-profitable oil industry?

Background

The first practical production of an electric car was built in the UK in 1884 by Thomas Parker. However, electric cars were replaced in the 20th century by gasoline vehicles, which were much cheaper in comparison. It was only after 2008, when the market for electric vehicles started growing. This was due to concerns over growing oil prices and the environment.

In countries like the US, the sale of electric cars has significantly increased. In 2016, the sale of electric vehicles in the US rose by 37%. California, in particular, was the biggest market for electric cars. Globally, the sales of electric vehicles have more than doubled since 2014.

According to the International Energy Agency, in 2015, petrol and diesel cars accounted for 26% of the global oil demand. This was more than the demand from the aviation, shipping and petrochemicals industry.

Analysis

In 2017, the oil industry has had to deal with an oil glut and a significant drop in oil prices. However, it has remained profitable. In July 2017, the governments of UK and France announced that they would be banning diesel and petrol cars and vans by 2040. The nations are hoping to promote the sales of electric vehicles, which are more environment friendly.

Car manufacturers are adapting to this trend. In 2017, Volvo became the first car manufacturer to announce that from 2019, every new car in its range will have an electric power train. Tesla, the California-based maker of electric cars, has said it plans to raise $1.5 billion to fund the production of its latest vehicle. GM too is expanding its electric aspirations with the launch of a new EV that will hit the Chinese markets. The automaker's Chinese Baojun brand has come out with its first mass-market electric car, which will only cost $5,300.

Top executives in the oil industry have noticed this rising challenge. Ben van Beurden, chief executive of Royal Dutch Shell has said, “We have to have projects that are resilient in a world where demand has peaked and will be declining,” he said. “When will this happen? We do not know. But will it happen? We are certain. We still have less advanced economies which cannot simply make that switch [to EVs] because they do not have the electrical infrastructure and . . . the wealth to do so.”

Forecasts show that the demand for oil will keep increasing into 2040s but it will grow at a slower rate.

Assessment

Our assessment is that the rise in demand for electric cars poses an existential challenge to the oil industry. 

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