Britain and France have unveiled plans to ban the sales of new petrol and diesel vehicles from 2040
Rise of electric vehicles irresistible – but Big Oil will not just disappear
There was a headline in the Financial Times this week which read: “Rise of electric cars challenges the world’s thirst for oil”, a theme which has been much in the news since Tesla launched its new Model 3 (for which it is now raising another US$1.5 billion to accelerate production) and Volvo announced its cars would be all-electric or hybrid from 2019.
Britain and France have unveiled plans to ban the sales of new petrol and diesel vehicles from 2040, and other countries are not far behind.
According to the International Energy Agency (IEA), passenger vehicles accounted for 26 per cent of global oil demand in 2015, more than aviation, shipping and petrochemicals combined. One energy analyst, the highly regarded Kingsmill Bond of Trusted Sources, predicts a “tipping point” early in the 2020s as electric vehicles (EVs) reach cost parity with conventional vehicles. “The rise of the electric vehicle is yet another indicator of the systemic change in energy markets, and an early warning for oil investors,” he said. That is scarcely good news for the teams of bankers and advisers preparing for the listing of Saudi Aramco, whenever – and wherever – that will be.
Big Oil has been forced to react to the widespread notion that the EV marks the beginning of the end for the mighty industry. Ben van Beurden, the chief executive of Royal Dutch Shell, took the issue head-on when he addressed his shareholders recently. “We have to have projects that are resilient in a world where demand has peaked and will be declining,” he said. “When will this happen? We do not know. But will it happen? We are certain.”
In fact, Mr van Beurden reckons, if countries adopt even more aggressive policies on climate change, “peak demand” could come as soon as the late 2020s – no time at all for an oil company that invests in fields that go on producing for decades. Bob Dudley, the chief executive of BP, has also acknowledged that the rise of EVs is “inevitable”, but in his view conventional cars will continue to dominate the roads for many years. “We’ve forecast that 100 million electric vehicles will be on the road by 2035,” he said. “Even if you doubled that to 200 million, there would still be 2 billion conventional vehicles on the road.” That should see him out – the next generation of BP managers can wrestle with that one.
There are, of course, all sorts of other factors affecting the complex balance which will determine the oil price in the long term: the growth in aviation and heavy transport, not so easily converted to electric power, of petrochemicals, the future of shale oil and all the politics surrounding the producing nations. Although demand for crude oil is forecast to fall by about 12 per cent by 2040 in the wealthy OECD countries, the IEA projects to grow by 19 per cent in the non-OECD countries. By then 60 per cent of demand will come from outside the OECD. The EV, although significant, is just one more complication.
Industries and companies are actually far more resilient than gloomy forecasters often predict and the oil industry will be the same. I remember, as a financial journalist, attending a briefing on the future of the tobacco industry in the late 1960s. The link between cancer and smoking, which the tobacco companies had vehemently denied for years, was finally proven beyond all doubt in 1969 and analysts assumed that smokers would take note and, basically, give up. The industry seemed to be finished and tobacco companies began a frantic policy of diversification, using their huge cash flow to buy just about anything that moved. BAT became a major conglomerate, acquiring insurance companies, fragrances (Yardley and Lentheric) and all sorts of other businesses it knew nothing about. Then, in the early 1990s. Jimmy Goldsmith and Jacob Rothschild made a bid for it – the biggest takeover in the world at the time – with the intention of breaking it up again, trimming it back to its core tobacco business and flogging everything else. BAT saw them off by announcing plans to break itself up with the result that value of the company today, a pure tobacco play, is US$144 billion, six times what the predators offered.
Other tobacco companies went through similar experiences and are also still around. Philip Morris, the biggest tobacco company in the world, commands a stock market value of $178bn, Altria comes in at $128bn and Imperial Brands at $32bn. Japan Tobacco has a market value of ¥7 trillion (Dh233 billion).
There are many other examples. The end was also seen to be nigh for the big passenger ship companies in the 1960s, when the jet plane came in but they reinvented themselves as cruise operators, which are basically hotels on keels, and thrive today. Newspaper companies have been dying for years, but somehow the industry is still around and Rupert Murdoch, clever enough to move into electronic media, is doing pretty well.
There is little doubt that historians will one day mark the launch of the Tesla 3 as a hugely significant moment for the world’s auto industry, for climate change, consumer habits – and particularly for the oil industry. But the fact of the matter is that Big Oil will be with us for many years yet.
Ivan Fallon is a former business editor of The Sunday Times