Will plug-in electric cars impact oil demand?

If you take a quick look at my portfolio, it is no secret that I am heavily invested in the energy sector, especially oil weighted companies. As much as I enjoy investing in this sector, I have built a case justifying my decision based on a 10 year timeline. Since I am investing my money and not gambling, I need to take into consideration any risks to my investment for this time frame.

The majority of oil in the world is used as a transport fuel. On average it’s about 60 per cent of all the oil consumed. Planes fly on jet fuel made from oil, ships run on bunker fuel made from oil, and, most importantly, motor vehicles run on gasoline or diesel made from oil. However, electric cars will be rolling off the assembly lines, in small numbers first, by the end of 2010 and in increasing numbers year after year. What would the impact of Electric Vehicles (EVs) be on my oil investment scenario?

Let’s take a look at EVs from 2 companies amongst several working on this new technology.

Meet the Electric Vehicles (EVs)

Chevrolet Volt EV

The Chevrolet Volt is a plug-in hybrid electric vehicle to be produced by Chevrolet, a division of GM. It is expected to be launched as a 2011 model in Q4 2010. Fully charged on-board batteries can power 40 miles (64km) and it can be recharged by plugging the car into a 120V residential electrical outlet. Chevrolet is taking your orders for the upcoming Volt EV since the end of July. The pricing starts at $41,000 or as low as $33,500 if your tax situation qualifies for the full $7500 federal income tax credit in the US.

So far, GM planned production for 2011 is only 10,000 units rising to 45000 units in 2012.

The Nissan Leaf is a plug-in hybrid electric vehicle to be produced by Nissan. It is expected to be launched in December 2010. Fully charged onboard batteries can power 100 miles (160km) and it can be recharged by plugging the car into a 120V residential electrical outlet. The pricing starts at $32,780 or as low as $25,280 if your tax situation qualifies for the full $7500 federal income tax credit in the US.

The initial supply of LEAFs for the first two years will be built in Japan.  That plant has an annual capacity of 50,000 cars, 20,000 of which will be shipped to the US. Nissan expects to sell 500,000 Leafs by 2013. In late 2012, Nissan will open its US-government funded Smyrna Tennessee LEAF plant that can build 150,000 cars per year.

The Consumers

There will definitely be buyers for those cars but it will not be a stampede. Let’s look at some of the factors consumers will consider:

Cost: At this price tag, you are not buying the cheapest vehicle out there; many consumers would probably prefer to buy a car such as a Toyota Corolla. Others would standby and watch until prices drift lower before buying. With increased production and newer generations of EVs, the prices will be falling down over the next few years.

For those consumers that can afford the price tag, usually many of them are not really bothered by the price of gas. On the other hand, the “green” ones amongst them would be first to take the step.

Reliability: We are talking 1st generation technology here. Teething problems are inevitable once these cars hit the road. After 2-3 years of usage, will the battery have the same energy storage capacity? How will that affect the mileage? What kind of problems will the first owners be facing?

Here again, there is a segment of consumers who would sit on the sidelines and wait until newer generations solve any outstanding issues and improve battery performance. It’s a win-win situation for them waiting for higher dependability and lower pricing.

Behavior: I am not sure a lot of people are ready to change their behavior. You have to plug-in your car every night; it’s a routine one has to develop. Some people have trouble brushing their teeth every night before they go to sleep.

Another important issue customers have to cope with is the length of their trip. How far are you going on each trip?  Do you have enough juice after your daily commute to reach another destination? In this case, technology could solve the problem by having the car equipped to keep track of your daily movements as well as calculating any extra distance you will be covering. Simply put, you got to track those miles (kms).

Oil Prices: High oil prices trigger demand destruction. If we were to see a repeat of the prices we saw at the pump in 2008, EV adoption rates will certainly accelerate. On the other hand, OPEC is aware that higher oil prices tip importing economies into recession and boosts alternative energy products. They will make sure that supply and demand are matched at a reasonable price range. That is, until supply tightens and becomes harder to match rising demand. The price of oil is a risk factor that can impact consumer behavior immensely.

The Manufacturers

The car manufacturers are in it for the long term, they know full well that there’s no money to be made in the short term. It’s going to be a while before billions of dollars in investments are recovered.

Profitability: Let’s say it bluntly: in order to make money with EVs, they need to be produced in the hundreds of thousands, not in the thousands which mean that there will be no profits in the first 3 years at least. According to a report in the Wall Street Journal, Nissan US sales and marketing chief Brian Carolin said the LEAF also would lose money in its first two years. “Over the course of the vehicle life, it is profitable—in year three,” he said. Of course, the manufacturers have to start somewhere, so it’s normal.

In the short term, the vehicles that will provide meaningful profit margins for manufacturers will remain pickups and SUVs, neither of which are particularly fuel-efficient. If you’re a conspiracy theorist, this is fertile ground right here to come up with scenarios on how EV numbers could be manipulated to remain low.

Sales Projections: The launch of plug-in electric models is expected to double sales of electric-powered vehicles to 24,000 units worldwide in 2010. In 2015, according to J.D. Power, sales of electric vehicles are expected to total 500,000 units globally. If vehicle sales in the US get stuck at 10 million units per year (highly unlikely), the number of EV units sold globally would be equivalent to 5% of the US market sales, pretty dismal if you ask me.

On a side note, again based on the same source, in 2015 hybrid vehicles are expected to come in at 2.3 million units, and to comprise 4% of global light-vehicle sales.

David Mondragon, Ford Canada’s chief executive, has a different take on numbers. He predicts that at most 2% will make the switch to electric cars by the end of the next decade. He also predicts traditional internal combustion engines will make up about 75 per cent of global demand and hybrids around 20 to 25 per cent in 2020, leaving electric cars with a single low digit for market share.

I like to hear the opinion of someone who is plugged-in (pun intended) to the industry and it certainly gives his opinion more weight. However, I would personally prefer to review the market share of EVs in 2015 since predictions appear to be cloudy beyond that.

Final Thoughts

There is more to this subject than what I reviewed. For example, how far will the government go in subsidizing this sector?

Is there a political will to accelerate the adoption rate of EVs?

Will big bad oil companies stand by watching as EVs eat into their profits?

Do we have the electrical infrastructure to support hundreds of thousands of cars plugged in?

Considering the full life cycle of the car, is it really as “green” as it looks?

In the US 45% of electricity is generated by coal plants, are we just shifting the source of pollution from foreign oil to domestic coal in some states?

The Verdict

With a great degree of certainty and based on the numbers reviewed above, my case for investing in oil is safe until at least 2015 and most likely until 2020. I personally would be part of the consumer group who would wait for reliability to go up and prices to go down before buying in providing the technology accommodates more than the compact car class. I will be reviewing this “risk” factor to my investment thesis as time goes by and new data becomes available.

Do you feel safe investing in oil? Do you plan on buying a plug-in electric car in the near future?

23 comments to Will plug-in electric cars impact oil demand?

  • Dd

    Great points… I heard once that it takes 100 barrels of oil to make one car, I wonder how many barrels of oil it takes to make and recycle the battery in these cars?

    It seems like the world is substituting one problem for another–frankly I would hold the oil position and expand into nuclear. I see no other way for us to sustain our energy needs if these cars take off.

  • Great post.

    As long as oil stays as low as it is (<$100 per barrel) I don't see anything changing for at least 20 years.

    A litre of milk at the grocery store costs more than a litre of gas in your car. We are lucky it doesn't cost more right now. It will, it has to :)

    I hope to buy some HSE, some CPG or some more SU in 2011 for my oil investments; all proven dividend-payers.

  • Dd’s point is exactly what I was thinking of: What is the total lifecycle impact of this car? These electric vehicles might be more wasteful of resources once you take increased electrical generation costs, manufacturing costs, and environmental impacts of battery disposal into account.

  • Mich

    @dd, I really hope we are not substituting one problem for another. I guess investing in Lithium is another way of profiting from this upcoming technology.

    @FC, I hear you and I believe OPEC are also aware of this sensitive balance in oil prices. They will not let the price rise unless supply tightens due to regional tensions or increased demand!

    @IIW, I can’t wait to hear Green-Peace’s opinion on that! will they be able to criticize the electric car? Remains to be seen!

  • I would love to buy an electric car, but like you, I prefer to wait for the bugs to be worked out and the price to come down.

    As for your oil thesis, there are a lot of reasons that oil could go up (or down) in the future. For the near term, however, I don’t think electric cars will be the reason oil goes down.

  • Mich

    @BJ,

    It would only take a double dip and oil will be under $50 a barrel in a heart beat. On the other hand, that would have bad consequences on future supplies!

    I will be covering the impact of low oil prices in an upcoming post.

  • I think slowly over time more people may buy these cars, but not too much right now.

  • [...] This post was mentioned on Twitter by Kevin, Mich. Mich said: Will plug-in electric cars impact oil demand? http://t.co/6i0gs2Z via @BeatingTheIndex [...]

  • Not likely electric vehicles will have much of an impact until they become more economical to own. Of course, what until all those folks who buy one get sticker shock when they see their electric bills.

  • Mich

    @P90x, You said, it will take time, lots of it.

    @Biz, totally agree with you, there will be a huge segment of wait and see consumers who will only fork out the money after the neighbor has gone through all the headaches including paying an updated electricity bill!

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  • I think oil is still a good investment. If you can also take in a company that does transportation or can diversify in natural gas, it can limit exposure. I personally have investment in oil & gas and I am looking at more investments in the future. Our dependence on energy will not go down … and companies will recycle themselves to be competitive.

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  • Mich

    @PIE,

    Oil will be a great investment for the next 5-10 years at least. However, exposure to natural gas at its cyclical bottom is also great if you have the nerves to hold. This explains why i hold some companies with 50/50 mix (like DAY) where capex can be switched from one commodity to another.

  • I agree with your oil investment thesis. Great set of articles.

    Over the last year I’ve been loading up on healthcare stocks, and now I’ve been turning my focus towards analyzing energy. There’s none in my portfolio right now besides a diversified infrastructure LP, but there are two energy stocks on my buy list. Oil and Natural Gas companies have maintained low valuations and many of them pay great dividends.

  • Mich

    @DM,

    Compared to REITs and Utilities, Energy stocks are still a great buy at this point. The question is for how long before the next cycle of rising energy prices kick in?

  • I generally try to determine “what” rather than “when”. I have no idea when, but I’m pretty sure of the “what”- rising energy prices.

    At current valuations of many energy companies, even constant energy prices should provide solid returns. The eventual energy price increase, if it happens, would just be a lot of extra upside.

  • Mich

    @DM

    I agree with you on the “What” which explains my thesis and my resulting oily portfolio. In fact, I keep on repeating that oil anywhere above $70 a barrel is very profitable to Canadian producers. When the rise in price comes will not matter as I will be receiving my dividends all along.

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