ELEC­TRIC CARS AND OIL PRICES

Warn­ing over im­pact of plug-in ve­hi­cles on the elec­tric­ity grid

The Star Early Edition - - BUSINESS REPORT - Kevin Mur­phy Kevin Mur­phy is co-head of the Global Value Team, Schroders (UK). Mur­phy is pre­sent­ing at the Al­lan Gray In­vest­ment Sum­mit on Au­gust 31, 2017.

IN­VESTORS, who get caught up in the ex­cit­ing story sur­round­ing elec­tric cars, risk over­look­ing more im­por­tant, if less at­ten­tion-grab­bing, devel­op­ments.

What is more likely to see a long-term col­lapse in oil prices – the elec­tric car or the hum­ble com­bus­tion en­gine?

If you were to judge solely by me­dia cov­er­age or per­haps even by gut in­stinct, you might well an­swer “the elec­tric car”. But you would be wrong to do so.

So at least ar­gues a sin­gle, thought-pro­vok­ing para­graph from Deutsche Bank an­a­lyst Stu­art Kirk.

He notes BMW has said it will de­ploy 1 000 elec­tric ve­hi­cles in Ham­burg, In­dia wants to lower taxes on them and “Cana­di­ans fret that bat­tery-pow­ered cars will de­stroy the Al­berta oil-sands in­dus­try”, yet “it is not falling ga­so­line de­mand from elec­tric ve­hi­cles that oil in­vestors should worry about – not yet any­way”.

In­stead, Kirk ar­gues, it is ef­fi­ciency im­prove­ments to in­ter­nal com­bus­tion en­gines.

“As­sum­ing elec­tric cars can jump from 1 per­cent of global sales to­day to about one-third in 15 years,” he ex­plains, “the 100 mil­lion elec­tric cars added an­nu­ally by then low­ers oil con­sump­tion by 1.3 mil­lion bar­rels a day.

“In com­par­i­son, main­tain­ing the cur­rent 1 per­cent rate of en­gine ef­fi­ciency gains would mod­er­ate de­mand by 3 mil­lion bar­rels a day.”

What is more, when both fac­tors are com­bined, it is not un­til the early 2030s that over­all car con­sump­tion of petrol even starts to fall. So, while the nar­ra­tive cur­rently build­ing up around the fu­ture of elec­tric cars is huge and high-pro­file and eas­ily cap­tures the imag­i­na­tion, it is also, in com­par­i­son with other, far less at­ten­tion-grab­bing devel­op­ments in the car in­dus­try, es­sen­tially ir­rel­e­vant.

Petrol and diesel en­gines still dom­i­nate.

The cru­cial point here is not the growth be­ing seen in sales of elec­tric cars and their more tra­di­tional coun­ter­parts, but sim­ply that there are so many more petrol and diesel en­gine cars cur­rently be­ing driven around.

And while, ac­cord­ing to the In­ter­na­tional En­ergy Agency, the num­ber of elec­tric ve­hi­cles on the world’s roads passed the 1-mil­lion mark in 2015, that is less than one one-thou­sandth of the 1.2 bil­lion mo­tor ve­hi­cles es­ti­mated to be driv­ing around at present.

Ev­ery­body loves a good story – and elec­tric cars are cer­tainly that. Value in­vestors strive to ig­nore sto­ries, how­ever, be­cause they can serve to dis­tract from what is re­ally go­ing on – in­clud­ing the small, in­cre­men­tal rises in ar­eas such as ef­fi­ciency im­prove­ments in in­ter­nal com­bus­tion en­gines that, while they may seem in­signif­i­cant, can end up hav­ing a highly sig­nif­i­cant im­pact on in­dus­tries, busi­ness and in­vest­ment re­turns.

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