Will EV Sales Growth and Global Spread of Fracking Keep Oil Cheap Forever?

What a difference a few years make.

Perhaps you’re old enough to remember when scientists warned us about an impending ice age. Today, climate change concerns have to do with global warming.

Just a few years ago, “peak oil” — the theory of terminal decline once we’ve reached the maximum extraction rate from known petroleum reserves — was popular. A couple of recent perspectives, however, indicate that we may not hit peak oil production and consumption for the foreseeable future — and that the price of oil may actually go down long-term.

Perhaps ironically, part of the predicted future glut of oil will be due to embracing electric cars. Back in February, Tom Randall of Bloomberg published a lengthy analysis of the sales growth of hybrid and electric cars. He concluded that while EVs don’t make up much of the global automotive fleet today, sales are increasing at double-digit percentages annually and eventually EVs will add up to a significant fraction of the light vehicle fleet. Global sales of EVs grew by 60 percent in 2014. EVs would make up 35 percent of passenger cars and light trucks by 2040 if that rate continues.

A 60-percent annual growth in EV sales would mean a drop in demand for oil by about 2 million barrels a day within a decade by 2023. Two million barrels a day is about the amount of extra oil supply that was behind the 2014 oil crash and our current low gasoline prices. Since a 60-percent growth rate may not be sustainable, no pun intended, Bloomberg’s New Energy Finance group looked at the results of more modest EV sales predictions based on anticipated component cost drops. Battery prices dropped 35 percent in 2014 and, if the trend continues, EVs should be competitively priced against gasoline or diesel-powered cars about six years from now.

Using that model, it will take longer for EVs to depress demand for oil by 2 million barrels a day, but only by another five years, to 2028. The law of supply and demand says that when demand goes down, so do prices.

As an aside, I’ll note that Randall doesn’t consider a somewhat recursive, but important, question: if EV sales mean decreased demand for oil, won’t the resulting lower prices for oil slow EV acceptance?

What about the supply side of the question? Three factors seem to have caused the current glut: increased oil production in North America due to horizontal drilling and fracking in the U.S., production from processing tar sands in western Canada, and the decision by the Saudis and other Middle East oil producers to keep the spigots open to keep up their own market share.

Two economists who study the price of oil point out that the United States and Canada are not uniquely situated with oil easily extracted by modern methods. Many countries have similar deposits. Marian Radetzki of Luleå University of Technology in Sweden and Roberto Aguilera of Curtin University in Australia are the authors of “ The Price of Oil.” In a post on Scientific American’s website, titled The Age of Cheap Oil and Natural Gas Is Just Beginning, they say that as new oil extraction processes are applied to newly found deposits and older, partially depleted oil mines around the world, we could see supply increase by as much as 20 million barrels a day by 2035. That’s ten times the amount of the current increase in the supply of oil.

Of course, there will still be demand pressure while China, India and the rest of the developing world get richer as their economies industrialize and develop. Yet, even with that increased demand, Radetzki and Aguilera predict that an additional 20 million barrels a day would mean a 2035 price of $35 a barrel in today’s dollars. That low price and its attendant low profits might not be an obstacle to increased production. While $30/bbl is usually given as a price floor these days, there are some American frackers who say they can make money at that price; there may be a new, lower price floor as extraction technology improves.

Redetzki and Aguilera are not just optimistic about the price of oil. They believe that what they describe as a “geographically diversified oil supply” will also make obsolete the notion of using energy supplies as a geopolitical tool. Regional conflicts, like those in the Middle East, become less of a global problem because producers won’t have the leverage to threaten the world economy.

Lovers of the internal combustion energy can belay their fears. The voice of the V8 engine will be heard in the land for generations.

[Image: Tesla Motors]