The rise of EVs in Asia: rough road ahead for the oil business?
In 2015, the number of electric vehicles (EV) on the world’s roads passed one million for the first time in history. Although still small, the EV market is growing exponentially. Annual new EV registrations (including battery and plug-in hybrid vehicles) grew from almost nothing in 2003 to around 550,000 units in 2015.
Major supporting factors include environmentally friendly efforts to reduce air pollution, the desire to curb reliance on fossil fuel consumption, the rapid development of EV infrastructure, and the advancement of battery technology, which has helped cut the cost of EV batteries by 65% over the past five years.
From a consumer’s perspective, EVs consume far less energy than gasoline-powered cars and generally cost about two-thirds less than gasoline vehicles to run. Electricity prices are also more stable than gasoline prices, and EVs often have lower maintenance costs. Moreover, EVs operate quietly and many models are a pleasure to drive. If the number of gasoline-powered cars in use keeps declining, the impact on the global oil industry will be inevitable. But will it affect Thailand?
To be sure, EV adoption is only statistically significant in a handful of countries, including the United States and some European countries such as Norway and the Netherlands. Thailand, on the other hand, has registered only about 100 EVs so far, a mere 0.001% of the total number of motor vehicles in the country. EVs therefore will not negatively affect the domestic oil sector in the short to medium term.
However, from a regional perspective, it is worth noting that China and Japan are the top two countries in Asia in terms of EV use. Both also happen to be key oil importers. The issue is whether this will affect the oil sector in Thailand and other Asean countries that have been exporting oil to China and Japan.
DISRUPTIVE TECHNOLOGY
With China and Japan only able to produce 39% and 0.3% of their domestic oil demand, respectively, EVs are considered a disruptive technology to address the oil issue. In 2015 China surpassed the US as the biggest EV market in the world. There were around 200,000 EV registrations in China that year, bringing the total to 310,000, or approximately 1% of the market in the country.
Japan has 130,000 EVs registered, or 0.6% of the market.
These two markets are heavily supported by their government policies that offer attractive incentives to use EVs, including a subsidy of up to 25% of the sale price, free licence plates (a plate for a gasoline-powered car can cost up to US$12,000 in Shanghai) and free parking spaces.
Moreover, the governments of China and Japan are also pushing for more charging stations and extending them along highways and local roads and in smaller cities. The latest figures from June 2016 show that there are now 85,000 charging stations in
China, a 65% increase from a year earlier, and the number of EV charging stations has outgrown the number of petrol stations in Japan.
EIC believes that all these key factors, including technological advancement, climate-change mandates, and EV purchase incentives, will help sustain the continuous high growth of the EV markets in China and Japan.
Assuming 50% annual sales growth, EIC projects that EV sales in the two countries will reach 1.8 million in 2020, bringing the combined EV stock to 5 million. This would reduce oil consumption by 400,000 barrels per day, or about 3% of total oil consumption in the two countries, which will increasingly put pressure on the oil industry.
Yet, EVs are not an absolute oil killer. In the long run, EIC believes that oil consumption will still dominate, especially for long-haul transport, which exceeds EV battery range and for which finding charging stations would prove too troublesome.
Major players in the oil sector don’t seem too concerned with the growth of EV markets, with BP projecting that EVs will make almost no difference to the transport sector until beyond 2035, while Opec maintains that EVs will make up just 1% of global cars in 2040.
In fact, declining oil prices have posed a threat to the widespread adoption of EVs. Gasoline prices are one of the major factors influencing consumers’ decisions about what kind of car to buy. Considering that total US car sales hit a 15-year record of 17.5 million last year as cheap gasoline lifted demand, the number of EVs as a percentage of cars sold actually fell.
In Asia, new EV registrations jumped by 183% in China last year amid low gasoline prices. This, however, was still lower than annual growth of over 200% in 201314 when gasoline prices were still high. Likewise, new EV registrations in Japan contracted by 24% last year, compared to annual growth of 15% in 2013-14.
Nevertheless, the rise of EVs in Asia will have some negative impacts on Asean countries as crude oil and petroleum product exporters. Growth of EV sales in China and Japan stemming from such supporting factors as more affordable prices, a larger selection of models and improved performance, as well as the increasing number and location of charging stations, will slow down oil demand in the two countries.
This is especially true for China, which has a policy to reduce oil imports and eventually become an energy self-sufficient country. As such, oil demand growth has decelerated from 9% in 2010 to only 3% this year. In Japan, oil demand is projected to actually contract by 3% in 2016. This is partly due to the slowdown of the economies of the two countries, which will negatively affect Asean countries, namely Indonesia as a main crude oil exporter and Thailand, Singapore and Malaysia as petroleum product exporters to China and Japan.
Thailand has a refinery capacity of around 1.3 million barrels per day, which is enough to cover domestic demand and exports. China is Thailand’s main petroleum product importer, accounting for 11% of Thailand’s total petroleum product exports in 2015. The share, however, has decreased from 15% in 2013.
As a result, Thai oil companies are looking for new export destinations, such as the CLMV countries, where oil demand is projected to rise by 15% annually between 2016 and 2020. Moreover, import duties on gasoline from Asean countries are supposed to be removed from 2018 onward.
OTHER OPPORTUNITIES
While EVs might pose a threat to the oil industry, they will open up business opportunities for other industries in the energy sector, including investments in power plants, charging stations and battery enhancement. The increasing demand to charge EVs will offer investment opportunities in developing quick charging stations and power plants, particularly solar power plants in China, or solar rooftop technology in Japan.
Nevertheless, investors need to be cost-efficient as the two countries already have competitive bidding schemes in place. As automakers expand their EV lineups, opportunities to become EV battery cell and module manufacturers and exporters are also present, but this requires innovative R&D to produce high-quality, long-lasting, and ultra fast-charging batteries.
No matter how quickly or slowly the EV boom arrives, electric cars are becoming increasingly common. They are here to stay. Past examples such as Kodak or Nokia remind us not to resist change, but instead embrace it, adapt to new trends, and always look out for business opportunities that may come in any shape or size.