Will Tesla kill off the demand for oil? Not quite yet

Tesla's electric cars continue to fascinate. Their silent, yet jaw-dropping, acceleration is already legendary and the interest surrounding the company's new, more affordable, Model 3 highlights how the excitement surrounding the company shows no sign of diminishing.

Yet the question of how the world will change once electric car sales really start to take off has receives surprisingly little interest.

When Tesla accepted reservations for its new Model 3, which has a starting price of $35,000, the car maker was swamped by people eager to put down $1,000 as a deposit. Within just a few weeks, 400,000 enthusiasts had ordered a car they hadn't even seen in the flesh, let alone driven. Delivery is also still some way off, expected to start in 2018. While any reservation is non-binding, the interest in the new Tesla sends a powerful signal to the car industry. People are ready to switch from fossil fuel to electric and/or plug-in hybrid once the right car comes along.

The future is electric

Tesla fans standing in long lines to preorder the new Tesla in March, 2016.
John Leyba | The Denver Post | Getty Images
Tesla fans standing in long lines to preorder the new Tesla in March, 2016.

Although the pace of the transition is hard to predict, we believe that the long-term future of transport will be electric. How quickly we will see a meaningful number of electric cars on the streets depends on a variety of factors: the price of oil, battery costs, government policy, and, of course, consumer behavior.

The one point that stands out is battery costs. It determines to a significant degree the price of cars offered. So far, electric cars that offer enough range for consumers to consider it as their only car are expensive. The price of the battery alone can be the equivalent of a medium-sized car. For Tesla's flagship model S, analysts estimate the battery's cost is around 27 percent of the car's total price tag.

This means that for electric cars to compete against petrol vehicles, battery costs still need to be cut significantly. The current cost per kilowatt-hour is $300 (equating to roughly $7,000 for the Tesla S battery). According to industry estimates, the cost will be halved within the next five to seven years, based on economies of scale as more cars are produced, as well as efficiency gains within the production process. This will make the cost of owning an electric vehicle much more competitive relative to internal combustion cars. This calculation assumes some moderate government subsidies of the kind we are seeing already in some countries.

Forecasts vary wildly

Currently, almost two-thirds of global oil demand is used for transport, of which 85 percent is road transportation. This means electric cars will have a major impact on oil demand once their number grows. But this is still a long way off: Only around half a million electric cars were sold in 2015. The global fleet of electric cars is around one million, less than 0.1 percent of cars on the road. Long-term estimates for electric car penetration vary widely, and are basically anyone's guess.

Even looking forward to just 2025, forecasts for global electric car sales vary between 5 percent and 15 percent of total sales. If we accept an optimistic estimate of 40 percent annual growth rate of electric car sales, then by 2020 this would result in an electric car fleet of 8.5 million vehicles or 0.6 percent of global car stock.

Further out, these extrapolations become ever more inaccurate, but if we stick to the same growth rate until 2025, then the cumulative electric car fleet would result in 50 million vehicles or 3.3 percent of the total number of cars.

A decade away

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These calculations show that even on the more optimistic assumptions, the share of electric cars on our streets will remain comparatively low for at least another decade. By 2020, it would mean a reduction of 0.3 percent of global oil demand, by 2025 the reduction would be 1.7 percent or 1.7 million barrels per day.

In a nutshell, compared with other forces that impact the supply and demand of oil, electric cars will be a small factor for the foreseeable future. Over the next three to four years, the impact of electric vehicles can be ignored. Over this time horizon, for which we can predict developments with some degree of confidence, we expect the crude oil market to remain tight as a result of the massive investment cutbacks of the oil exploration and production industry.

Looking further out, we would anticipate peak demand for oil to occur sometime after 2025, but probably not before 2030, at which point electric vehicles are likely to become a more significant driver of the demand trajectory.

Roberto Cominotto is investment director at GAM for energy equities. You can follow him on Twitter @GAMinsights

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