Peter Tertzakian: Will electric cars unplug oil prices?

Electric car sales are starting to obtain traction. Analytically, the numbers are showing growth. However, you have no need for a spreadsheet to determine the popularity. Cars built by Tesla, BMW yet others are turning heads at street corners C and turning investor sentiment too.

So, Arthur’s question was unsurprising. And it was exactly the same question that is simmering around the frontal lobes of numerous energy investors I know: “These things are going to clobber oil prices are they not?”

I paused before answering Arthur around the speaker phone, because I’m always wary of tackling this question. Electric vehicles have had many failed attempts at attempting to break into the monolith of petroleum-powered transportation. The hype-and-failure cycle has come and gone at least three times within my 30-year career.

“Maybe they’ll,” I replied hedging my answer, “it’s difficult to argue from the simple logic that’s charging in the headlines: electric cars will take share of the market using their gas guzzling peers, reduce petroleum demand, and will therefore zap the cost of a barrel forever.”

“That’s the thesis,” agreed Arthur, “and I’m starting to believe it’s possible.”

I took a sip of coffee, my necessary precursor to offering a contrarian view.

“Actually Arthur, I have long been a large believer in EVs,” I said, “significant adoption is inevitable, but here’s the irony: A ramping from electric car sales C and electric car hype C is likely to drive the price of oil up, not down.”

Now it had been Arthur’s turn to provide a pregnant pause. I could sense behind the speaker he was wondering how substituting gasoline with electrons could create an oil shortage.

“It’s a matter of timing and scale,” I explained, “or more to the point, mis-timing and insufficient scale.”

Our conversation went on to go over the gist of the looming problem. The appetite of oil companies to invest billions on big, long-term projects is already diminishing C diminishing faster than will probably be the growth in demand-side substitutes. Quite simply, the timing is off: investment into upstream oil capacity C things like big offshore platforms C within the next Ten years is likely to decline faster than electric vehicles can grow.

“Your telephone call is symptomatic of broader sentiment.” I said. “Unease surrounding the first credible threat to oil in 100 years is altering perceptions of risk and return. Shareholders as if you, boards-of-directors and CEOs are already questioning whether to expose billions of dollars to big, multi-decade megaprojects with today’s low prices. The growing threat of gradual obsolescence will only actually amplify perceptions of higher risk minimizing return C that will hose down still-needed investment into future oil reserves.”

“So what you’re saying is the fact that divestment out of long-term big oil projects has started,” mused Arthur.

“Yes,” I affirmed, “and in my mind it’s happening faster than people realize; the possibility scale and timing of oil divestment isn’t looking balanced against the scale and timing of individuals swapping out their gasoline-powered SUVs.”

I gave Arthur my prediction. Over the next few years the headlines will legitimately boast impressive growth rates of EV sales C there are plenty of views available, but we’ll probably hit a million-a-year globally by 2020, maybe more. Analysts can get overzealous about exponential adoption forecasts as automakers roll out more models. The psychology will chafe on decision makers; oil companies, beholden for their shareholders will be increasingly unwilling to making investments into long-cycle mega-projects. The faster EV sales grow, the higher the perceived risk to big oil projects, the slower the interest rate of investment. So, the backbone of global oil supply will probably contract in capacity C massive delays and cancellations are already seeding this trend.

Meanwhile the most sophisticated math won’t overcome the staggering scale in our oil addiction. Millions of electric vehicles sales in a year may be enough to displace 50,000 barrels per day, but that’s de minimis when compared to 100-million-barrels-a-day the world will be guzzling after the decade.

Wrapping up the call, I expressed an associated concern, “Arthur, what worries use is the polarized psychology that’s taking root. The emerging mainstream view is that substitutes to oil transportation are quickly forthcoming. Yet mainstream behaviour continues to be anchored in buying bigger petroleum-powered vehicles.”

“So there’s more focus on divesting oil supply than you are on divesting oil demand,” pointed out Arthur. “I agree that suggests higher oil prices.”

“Maybe,” I said again hedging my response, “and we will certainly have a more exciting conversation concerning the potential of electrical vehicles the next time we have higher oil prices.”

Peter Tertzakian is chief energy economist and managing director at Calgary-based ARC Financial Corp.