The oil price shock of 2022 has driven a great deal of new interest in EVs, which has just served to help answer the question of what happens to EV adoption rates when oil and gas prices fluctuate.
It has supercharged EV demand, which is ultimately due to the economics of high oil prices, yet does help the climate. And this is despite the recent cooling in oil prices, which are probably temporary, more on that below.
Frankly there are a few moving parts here, right now EVs are supply constrained and it takes time to scale mass production, but companies have been catching on to the new paradigm of electrification. Frankly, 2021 was the breakout year, production plans were made, and production started scaling. 2022 has seen some of them come to fruition (Ford Lightning being a prominent example) and more are coming. GM being an excellent example of the many new models on the drawing board. We also can’t forget Tesla, BYD, and so many more.
Of course to scale EV production mineral production will have to be scaled — lithium, cobalt, nickel, etc.. These minerals are not all that rare, but increasing production always has a lag time. So to scale EVs you need the minerals and you need the automakers to do their jobs of building automobiles (and dealing with chip shortages).
All that said, oil prices are cyclical as we are now seeing, but then again EV costs will also fall. As more minerals come online, prices and manufacturing costs are reduced, and as factories are built more EVs can be made. Both learning curves accelerating will lower prices.
Frankly, if oil dropped to $40 a barrel today, EV demand would fall a great deal. It would still be decent, as it has been growing well before 2022 so probably still enough to absorb current supply and slowly growing, but it would not be as supercharged as it was this summer and still is. But as EV prices come down through learning curves they will sooner or later get close to price parity with ICE. Once it is within say 10-20%, ICE demand drops even at low oil prices because of the huge electric fuel savings. At parity or less, ICE is dead unless oil becomes virtually free long term irrespective of climate change concerns.
That said, oil prices being cyclical work both for and against it, the current drop is due to the end of the 2022 driving season (oil demand is always lower in the winter months), and demand destruction from record high fuel prices. And of course traditionally lower demand over an entire year leads to even less exploration for new oil, which causes a supply crunch and higher prices a few years later.
That was the pattern since 2008. But this time is different.
Oil exploration did not rise much in 2022. This was a conscious decision by major oil companies. For the moment, oil (and gasoline/diesel) prices have fallen from their early-mid 2022 highs, but the fundamentals have not changed. The ~7-10% of world supply that Russia was supplying is not fully offset. The demand has only fallen for now.
Next year we will likely be right back where we started.
There might be some changes, a renewed deal with Iran could add to world supply, but crude oil production will likely only rise marginally, OPEC likely cannot increase production beyond the mid 2022 peak because they don’t have the extra supply to offer, and refining of oil is another bottleneck — the world has not seen refinery capacity keep up with demand, which is actually the lion’s share of the 2022 price spikes as oil only rose to about $120, which would have been about half of the prices drivers were paying at the pumps. More net oil refinery capacity worldwide is not likely to be built and there has even been capacity loss due to Covid.
We may in fact be looking at a new normal until something snaps — lower winter oil prices and spring/summer spikes every year from now on.
As this article was being written, OPEC cut its production by 2 million barrels to keep oil prices high. Its economies need a relatively high oil price so this helps it in the short term.
And if OPEC continues to cut production to elevate oil prices, then that just keeps stoking EV demand.
In the end, what it likely to happen is Russia’s supply never returns to full because easing sanctions even if Putin surrenders will take time (and he is not planning on surrendering, despite the recent successful Ukrainian offensives). Plus many wells when temporarily curtailed never return to full production. Exploration may rise if we have years of insanely high prices, which will topple many progressive governments (voters love to kill the messenger).
Or we have a better option. More EVs.
EV production has been and will continue to scale and this will slowly cut into oil demand. At 100-150 million EVs on the road, oil demand will drop 10-15% bringing its price down massively as this number of vehicles will cut oil demand by far more than Russia was selling.
2020 (Covid lockdowns) saw a 20% reduction in oil demand, which brought the price of oil to zero. We can do this again without any lockdowns.
In 2021, about 8.6% of all new vehicles sold were electric, and 2022 will probably be 12-15%. If we assume 2023 is 20% and 2024 sells 25% of new vehicles as EVs, then we might be looking at over 50-75 million EVs on the road. This would cut oil demand by 5-7% or more, which will almost offset the loss of Russian oil just by itself.
So how do we get there?
In the US, the IRA is a huge motivator (642,000 new jobs and counting). Australia’s new climate change fighting government will hopefully come through, Canada is making some pro EV moves (and Tesla may open a factory there), China is looking to scale production and sell its EVs worldwide (lets hope they have good quality hardware and crash safety), and the EU knows firsthand what Russian oil/gas is costing it and is going seriously gung-ho on electrification.
But we can’t sit by idly and assume this will be enough.
In the short term, if voters continue to kill the messenger they will vote for conservatives who offer lies and easy answers. Once elected, they will gut EV incentives and regulations and mandates. And stupidly, fuel economy standards will get fricasseed (again) leading to even more oil demand and higher fuel prices (Freedumb y’all).
What we must do is to vote intelligently at the ballot box and with our wallets. Demand that your elected leaders invest in renewable technology, not just in installation but in increasing its production.
And we should not be surprised when gas prices spike again next year.
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