Cape Times

Electric cars and oil prices. Should investors be concerned by now?

- 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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