The short answer to the question is no, I don’t think so.
If you’re in a hurry, you can stop reading now. You have your answer. However, read on if you’re curious to know why this won’t happen and why EV adoption may only accelerate, at least as I see it.
I used to think that the EV adoption curve would look something like a double S shape.
I thought that EV adoption would draw down oil demand, which would then cause an oil glut, which in turn would push petrol prices drastically lower. This low-cost gasoline would dampen EV adoption for a time, at least until the upfront costs of purchasing an EV would come down significantly, a thing many of us believe and hope for.
I don’t think this way anymore.
Something I read or heard recently caused me to reflect on The Goddard School of Business econ and business classes I had years ago. I recall now learning about two things that have changed my thoughts about this: inelastic demand and fixed costs.
Demand elasticity has to do with how sensitive a product or service demand is to price fluctuations. If a product is very elastic, a small fluctuation in the price will result in a large decrease or increase in demand for that product.
As the price of the product goes up, people find substitutes for that product or they find that they can do without it. As the price goes down, people enjoy more of the product or may even find new uses for the product.
On the other hand, if the product’s demand is inelastic, fluctuations in price affect the consumption of the product very little. As the price goes up, people find that they must still have it and so they pay the higher price. Also, lowering the price doesn’t generate all that much greater demand either.
Classically, petrol, or gasoline, has been considered fairly inelastic. Regardless of the price, people still need to get to work and conduct other business, which requires burning gasoline. One thing that has kept prices from going through the roof is the entrance of new sources or new production.
A high price is too tempting to suppliers. The temptation to increase production can be too great. The plentiful supply then keeps prices lower. This was one of the impetuses behind the formation of cooperatives such as OPEC. The cooperative, which supplied much of the world’s oil, could set the production limits and prices. (Of course, the temptation to cheat has often been there and at times has been too hard to resist.)
Another important principle to keep in mind is business fixed costs. Those are the costs that a business incurs regardless of whether it sells a thousand units or none at all. These costs can be the costs that bury a business startup. The business has to pay salaries and wages, facilities costs, transportation costs, and other costs which, for practical purposes, don’t change much, regardless of sales volume. To cover these costs, businesses have two courses of action to pursue, either sell greater volume or sell at higher prices.
EVs and Gasoline
So, what does all this mean to EV adoption? We know that once someone “dumps the pump,” they are very unlikely to ever go back to an IC vehicle. And those who have both an EV and IC vehicles tend to work toward going all-electric.
This makes these people extremely inelastic toward purchasing petrol. Oil companies are hard-pressed to persuade EV owners to go back to burning their products, no matter the price.
A Thought Exercise
Now imagine for a moment that you sell an inelastic demanded product and demand for that product has been dropping a little every year. Over the course of four years, demand has dropped by five percent. You know that lowering your prices is not going to help sales rebound, you still have to cover your fixed costs, and you don’t want to lower your salary. Those poor souls who are still using your product will pay whatever they have to to get it. Raising prices seems like the best alternative.
Interestingly, in many instances, it doesn’t take a ginormous loss of sales to cause a business pain. Margins are often tight, and even a small five-percent drop in sales volume can hurt. Imagine what might happen when 10% of the vehicles on the road are electric. That will be a 10% loss in oil revenue.
Going forward, as the broader public moves toward adopting EVs, oil companies would have to sell petrol at a loss for multiple years to have any impact on impeding EV adoption. The more reasonable and likely course of action would be to raise prices, thus making up for the lost revenue. Of course, doing this is only going to make driving an EV all the more attractive. A feedback loop is generated.
I will not be surprised if by sometime around 2025 (give or take a year) gasoline begins to approach $6 a gallon in North America (1). (I’ll be more surprised if it stays around $3.50 a gallon.)
This is why and how Tony Seba’s prediction of accelerating EV adoption to over 75% within ten years of the tipping point could come true. Normally we would expect the fleet on the roads to gradually age out and not be readily replaced. Cars purchased in 2020 should be expected to still be on the road until 2035, or later. However, if in 2030, the cost of operating such a vehicle for five years is a full third the cost of a brand new EV (never mind its purchase cost), then it might be better instead to just opt for the brand new EV (or use robo-taxis) and send the 10-year-old IC vehicle to the junkyard.
Now, I’m not saying that this is how all this will play out, but rather, I’m saying that it “might could be” (to borrow a phrase). It waits to be seen, but certainly, it is within the realm of possibilities.
We could try looking, as Cathie Wood has, at what happened with the use and cost of whale oil in the second half of the 19th century. We could try learning from what happened then and see what history suggests. However, I do not think the parallels in the situations are close enough to draw meaningful conclusions. I do not see the petroleum industry entirely evaporating, rather only drastically reducing.
The one wild card in this scenario is developing countries. Could growing profits from the developing world keep oil companies happily afloat and keep the status quo going? Will developing countries have to go through an oil-burning phase before turning to green alternatives? We would hope that those countries can leapfrog ahead, join the modern world and skip the dirty years. Otherwise, the planet could be facing a long and dirty road ahead.
What do you think? Will petrol prices continue to rise over the long haul? Will market forces push EV adoption to unprecedented acceleration beyond what we can imagine today?
1. An important factor in this transition is the fact that demand will draw down slowly, over time. It will be unlike 2019 and 2020 when travel fell off a cliff and so oil prices fell substantially. A one percent drop in demand in a single year is not enough by itself to glut the supply. However, the cumulative effect of small multi-year-after-year drops in demand will push suppliers to take some sort of action.
Source: Read Full Article