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By David Byrns - March 14, 2018
The growing supply of electric vehicles as a portion of the global automotive fleet has some energy investors concerned. Will the rise of electric vehicles stall out oil markets and future crude demand? While some changes are to be expected, we have reasons to believe electric vehicles won’t significantly impair oil demand growth in the near future.
Gasoline consumption accounts for roughly one in every four barrels of oil produced globally. As electric cars become more mainstream, industry pundits worry how fewer gas-dependent cars will affect future oil demand.
The exact penetration rate of electric vehicles is hard to pin down, as several variables such as technology, costs, gasoline prices and consumer behavior influence that number. Yet a quick examination of the math shows the impact is likely to be minimal.
For example, industry consultant Wood Mackenzie estimates that the electric vehicle fleet will grow to 100 million by 2035, representing approximately nine percent of total unit sales.
ESTIMATED ELECTRIC VEHICLE MARKET PENETRATION BY 2035
Source: Wood Mackenzie
At the same time, the global passenger fleet is expected to grow to nearly 2 billion units due to global population growth and increasing ownership rates in developing economies. Since the average car lasts ten years, it takes time for the total fleet penetration rates to catch up to sales penetration rates. Therefore, only about 5% of the total number of vehicles globally will be electric vehicles 2033.
At five percent of the market, electric vehicles may displace an equivalent of 1.25 million barrels per day (mmb/d) of oil demand that would have been used for gasoline-powered transportation. While this seems like a big number, it helps to put it in context. Oil demand is currently 97 mmb/d and typically grows one to two percent annually due to global economic growth, which inherently consumes energy. Therefore, putting electric vehicles aside, the cumulative growth in oil demand would be 25 mmb/d by 2035. Thus, the 1.25 mmb/d impact to demand from electric vehicles is more than offset by future oil demand growth that’s typically associated with economic growth.
We will continue to diligently monitor the risk that electric vehicles present to oil demand growth and, by association, oil price norms. Currently, however, we view any weakness in energy equities associated with such concerns to be a potential buying opportunity.
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Though electric vehicles are expected to gain popularity, we have reasons to believe they won’t significantly impair oil demand growth in near future.
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As value investors, we believe the factors that drove down the share prices of many well-managed, energy-related companies are overstated. Energy companies may have the potential to return to historic profitability levels via improved efficiencies and cost cutting, providing compelling opportunities.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.