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Will Crude Demand Plummet On Electric Vehicle Mandates?

By Ellen WaldCommoditiesAug 09, 2017 05:05
Will Crude Demand Plummet On Electric Vehicle Mandates?
By Ellen Wald   |  Aug 09, 2017 05:05
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Several governments have recently announced long-range electric vehicle (EV) mandates intended to increase the use of electric powered vehicles and decrease the use of internal combustion engines in their countries. These countries include emerging markets like India, to well established European markets like Austria and the U.K.

Here is a rundown:

India: Energy minister Piyush Goyal stated that his goal is for India to only sell electric vehicles by 2030.

United Kingdom: The British government recently announced intentions to ban the sale of all gasoline and diesel fueled cars by 2040.

France: Emmanuel Macron’s government announced that France intends to ban the sale of all gasoline and diesel fueled vehicles by 2040.

China: In September 2016, the Chinese government announced a policy requiring that 8% of all car sales be “new energy vehicles.” The government defined this as either EVs, hybrid cars, or fuel cell powered cars. The mandate was originally intended to begin in 2018 but was pushed to 2019.

Austria: With the most ambitious plan of all, the Austrian Ministry of Agriculture and Environment announced it is considering banning the sale of all non-EVs by 2020.

In the long-term, these mandates have the potential to transform the oil markets (not to mention the equity values of vehicle manufacturers). If widespread adoption of EVs does actually occur, this will clearly depress the value of crude oil. For example, just under 50% of crude oil refined in the U.S. is processed into gasoline for vehicles, according to the EIA. However, do not get excited just yet about a transformation in fuel usage.

The problems with EVs now include: insufficient range, long recharge times, upfront expense, questionable resale value, undetermined lifespan on the battery, and insufficient charging infrastructure on the roads. Innovations and improvements do not necessarily happen because the government mandates it. Oftentimes, government mandates fail to bring technological innovation into existence (see the U.S. fuel-mileage mandates of the early 2000s which have been regularly missed).

However, if, in 10, 15, or 20 years, EVs are as (or almost as) prevalent at these policies hope, crude oil demand will have plummeted. For investors, just the fear of this may be enough to weigh on the price of oil for some time. The notion of “Peak Demand” has taunted oil traders and producers alike for a little over a year, with the possibility that demand for oil may not grow anymore due to transitions to alternative forms of power.

The last couple of weeks have seen much publicity for the future of EVs, between the debut of Tesla Inc (NASDAQ:TSLA)’s Model 3 car and the regular announcements of new EV mandates. That publicity alone makes it hard for the price trend of oil to rise, at least until the hypes over EV and “Peak Demand” subside.

Will Crude Demand Plummet On Electric Vehicle Mandates?

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Will Crude Demand Plummet On Electric Vehicle Mandates?

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