Electric Vehicle (EV) adoption is an increasing threat to oil demand, which could plausibly peak before 2030, Fitch Ratings says in a new report. This is not our core scenario, but developments in 2017 show how technological changes and greater product awareness could lead to annual sales of 10 million battery-powered EVs by 2025.
Last year saw a slew of EV product announcements driven by technological advances such as the continued decline in battery costs, consumer preferences, and environmental policy. Governments and manufacturers have set EV targets. OPEC has raised its forecast for the size of the EV fleet in 2040 to 250 million units from 140 million, and other forecasters have disclosed EV penetration assumptions for the first time.
To assess the potential impact of faster EV adoption, Fitch revisited the scenarios in its October 2016 report into the disruptive potential of battery technology and incorporated both conservative and more aggressive EV sales estimates based on car companies’ own announcements. The latter shows EV sales in 2025 slightly higher than in our extreme scenario from 2016 (which assumed a 33% CAGR of EV sales).
Of course, the path of EV sales relative to Internal Combustion Engine (ICE) vehicle sales will depend on how far consumer behavior and public policy goals support the heavy investment in EV production needed to meet bullish estimates. But by considering a scenario where EVs’ cost and range are comparable to ICEs, consumers prefer driving EVs, policymakers mandate and support electrification, and carmakers see cost benefits of focusing on one drivetrain, it is not unreasonable to expect global EV stock by 2040 of over 1 billion, or more than half the vehicles on the road.
This is not our core expectation. The pace and pattern of EV adoption will be more nuanced. Manufacturers have a history of missing big strategic targets, the development of charging infrastructure remains a key uncertainty, environmental impact assessments and policy could change, advances in battery technology may slow, and ICE technology may itself adapt.
But we believe the new extreme scenario has become more plausible over the last year. Applying it to oil demand, in combination with International Energy Agency’s (IEA) New Policies Scenario assumptions on non-transportation use, shows oil demand peaking in 2029.
Even then, the peak is shallow, with oil demand in 2040 broadly unchanged from today, as the world still needs to consume vast amounts of oil. However, the absence of rising demand would be a significant structural change in the oil market and could make prices more volatile and, on average, lower. Most large oil companies are taking steps to diversify into natural gas, petrochemicals, and alternative energy. Our ratings already take into account their production cost position, which is key in any market but would be even more important if demand weakens.