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The Oil Sector Will Survive The Arrival Of The Electric Car Just Fine

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Proponents of electric vehicles writing the oil industry’s obituary should put down their pens. There’s no denying that electric cars will significantly change the transportation landscape in the coming decades, but the transformation will be gradual and poses no “clear and present” danger to global oil demand through mid-century.

Electric vehicles won’t be the disruptor to oil products in the same way that digital technology was to photographic film or iPhones were to cellular phones. There will be no Kodak moment for Big Oil. That’s because electric vehicles and conventional gasoline- and diesel-powered automobiles will co-exist. It won’t be a zero-sum game, with ample room for growth on both sides, particularly as internal combustion engines become increasingly efficient.

Even under the rosiest forecast for electric vehicles, oil demand will remain robust through the mid-century. Modeling by U.K. oil major BP shows that even a worldwide ban on new internal combustion engine vehicles would create a 10 million barrels a day dent in oil demand by 2040. Considering the oil market is closing in on 100 million barrels a day of demand this year, that equates to a 10% hit to the oil industry – hardly a death blow.

Why is oil so resilient? Because demand growth for oil in sectors like petrochemicals, heavy industry, aviation and other heavy transport keeps expanding significantly. And these segments are largely insulated from fuel switching.

It’s not just Big Oil that believes this to be true. The International Energy Agency (IEA), the watchdog for large, developed energy-consuming economies, agrees. According to the IEA, an estimated 50 million electric vehicles will be in operation by 2025, and 300 million by 2040, compared to about 2 million vehicles currently on the road. That growth is expected to reduce global oil demand by 2.5 million barrels a day or about 2%. A factor of 6-to-1 easily offsets that reduction with increased demand from petrochemicals, trucks, shipping and aviation – areas the IEA says could lead to net demand growth of up to 14 million barrels a day.

All told, the IEA expects net oil demand to be 12 million barrels a day higher in 2040 compared to 2016, pouring water on the new “peak demand” movement that has sprung up among industry watchers and is as misguided as the “peak oil” supply predictions of a decade ago.

Naysayers point to China, India and other rapidly expanding economies in Asia, which have set aggressive targets for electric vehicle adoption. But look closer at where these nations are investing. China and India are investing in massive new refineries, multi-billion dollar facilities that are expected to produce oil products for decades. These countries are also investing in renewable and clean energy technologies to address pollution and meet their commitments under the Paris Agreement, but they understand that the electric car is not a magic bullet. Indeed, economic growth in developing nations will continue to drive demand for oil far more than electric vehicles will cut into it – and government planners know this.

The petroleum industry has several critical advantages over electric vehicles in the light transportation market that should keep it the lowest-cost provider for some time. Perhaps the biggest is a massive petroleum-based infrastructure of refineries, storage terminals and retail fueling stations where costs have already been sunk. The United States alone has 18.6 million barrels a day of refinery capacity and roughly 168,000 retail stations.

Traditional gasoline- and diesel-powered engines are also becoming much more energy efficient. The fuel economy of new U.S. cars and trucks hit a record 24.7 miles per gallon in 2016, and many smaller cars and clean-diesel vehicles offer fuel economy of 40 miles per gallon or higher.  The United States also boasts a growing fleet of four million hybrid gasoline-electric vehicles. The trend toward higher-mileage, less-polluting conventional automobiles will continue for decades to come.

On the flip side, the growth of electric vehicle sales in the United States – the world’s largest transportation market – is not based on free market principles. Most Americans who buy electric cars are making a political statement. Take away the federal tax credit for purchasing an electric vehicle, which ranges from $2,500 to $7,500, and the consumer market dries up. Contrast this with drivers of automobiles with conventional internal combustion engines, who pay a federal excise tax of about 18 cents per gallon for gasoline and 24 cents per gallon for diesel to fund national highway and bridge construction programs. The playing field is hardly level.

Environmental activists will argue that such advantages for electric vehicles are needed to counter the dominance of Big Oil, electric vehicles are not without their issues. An electrified transportation sector powered by coal would result in more pollution than the current fleet. The environmental community isn’t exactly warming to nuclear power, natural gas or even hydropower, either, which makes transforming the world’s transportation fleet on the back of wind turbines and solar panels a heavy lift. What’s more is that current battery technology requires invasive mining of rare earths minerals – a process that can cause as much environmental damage as conventional energy production.

The cost of batteries is dropping and efficiency is rising, making electric vehicles more competitive. While electric vehicles will continue to capture market share in urban centers, though, rural areas – where driving range is essential – will remain the domain of the internal combustion engine. What’s clear is that America’s transportation sector is evolving based on the demands of the market. The federal government should remove its thumb from the scale by eliminating distortionary subsidies and policy advantages. At the end of the day, the market will be large enough for electric vehicles and conventional internal combustion vehicles to thrive.