Electric shock for the oil market

China, world’s largest car producer, followed the UK, France, Norway and the Netherlands announced plans to completely ban cars on fossil fuels. Paradoxically, this can only spur oil prices.

Electric shock for the oil market

Источник: canghai76 / Shutterstock.com

China will set a deadline for automakers to end sales of fossil-fuel-powered vehicles, becoming the biggest market to do so in a move that will accelerate the push into the electric car market led by companies including BYD Co. and BAIC Motor Corp.

Xin Guobin, the vice minister of industry and information technology, said the government is working with other regulators on a timetable to end production and sales. The move will have a profound impact on the environment and growth of China’s auto industry, Xin said at an auto forum in Tianjin on Saturday.

The world’s second-biggest economy, which has vowed to cap its carbon emissions by 2030 and curb worsening air pollution, is the latest to join countries such as the U.K. and France seeking to phase out vehicles using gasoline and diesel. The looming ban on combustion-engine automobiles will goad both local and global automakers to focus on introducing more zero-emission electric cars to help clean up smog-choked major cities.

“The implementation of the ban for such a big market like China can be later than 2040,” said Liu Zhijia, an assistant general manager at Chery Automobile Co., the country’s biggest passenger car exporter that unveiled a new line for upscale battery-powered and plug-in hybrid models at the Frankfurt motor show last week. “That will leave plenty of time for everyone to prepare.”

BYD, China’s largest electric-vehicle maker, gained as much as 7.2 percent to HK$50.65 while BAIC advanced as much as 2.9 percent to HK$7.09 in Hong Kong trading. Guoxuan High-Tech Co., an EV battery manufacturer, rose as much as 5.3 percent to 33.70 yuan in Shenzhen.

While many global manufacturers from billionaire Elon Musk’s Tesla Inc. to Nissan Motor Co. and General Motors Co. are racing to grab a slice of the electric-vehicle market in China, it is the local manufacturers that have found considerable success thanks to generous government subsidies.

Race for Chinese pie

Warren Buffett-backed BYD led the pack in sales in the first seven months of this year, delivering 46,855 electric and plug-in hybrid vehicles, according to the China Passenger Car Association. Beijing Electric Vehicle, the EV division of state-owned BAIC Motor, followed with 36,084 units. In comparison, General Motors has sold 738 cars run on electricity since it launched the Velite 5 plug-in hybrid model at the Shanghai auto show this April. That is 0.04 percent of its 2.1 million vehicles sold in total in China during the seven months.

Besides subsidies that also are aimed at meeting the strategic goal of cutting expensive oil imports, the government plans to require automakers to earn enough credits or buy them from competitors with a surplus under a new cap-and-trade program for fuel economy and emissions.

Honda Motor Co. will bring its electric car for the China market in 2018, China Chief Operating Officer Yasuhide Mizuno said at the Tianjin forum. The Japanese carmaker is developing the vehicle with Chinese joint ventures of Guangqi Honda Automobile Co. and Dongfeng Honda Automobile Co. and will create a new brand with them, he said. Nissan, which unveiled an upgraded model of its Leaf EV last week, said it will introduce the car in China in 2018 or 2019.
Internet entrepreneur William Li’s Nio will start selling ES8, a sport-utility vehicle powered only by batteries, in mid-December. The startup is working with state-owned Anhui Jianghuai Automobile Group, which also is in a venture with Volkswagen AG to introduce an electric SUV next year.

Tesla said in June that it’s working with the Shanghai government to explore local manufacturing, a move that would allow it to achieve economies of scale and bring down manufacturing, labor and shipping costs.

Though Chin has announced its intentions, the process will be complicated and will take time for all the auto-sector regulators to come up with an implementation plan, said Zhang Yang, a vice president at Nio. But it will help set a clear direction for manufacturers, he said on the sidelines of the Tianjin forum. China has the world’s largest scale of fossil-fuel vehicle production facilities.

“This will ask everyone, from energy and technology sectors as well as traditional automakers, to change to the lane to develop new powertrains,’’ said Zhang. “It’s hard to say who can be the winners at the moment. All of us should stand the test of speed and endurance in this run.’’

The U.K. said in July it will ban sales of diesel- and gasoline-fueled cars by 2040, two weeks after France announced a similar plan to reduce air pollution and meet targets to keep global warming below 2 degrees Celsius (3.6 degrees Fahrenheit). Norway and the Netherlands are considering a more aggressive way to put an end on fossil fuel cars years earlier than its European peers.

One more chance for oil industry

China’s decision on whether and when to ban cars burning gasoline and diesel could alter our view of how far we are from a peak in global oil demand, writes independent energy analyst Geoffrey Styles. Even though the likely date of such a peak is highly uncertain, the idea of an impending peak could significantly affect investments and other decisions.
A few months ago the British government made headlines when it announced it would ban new gasoline and diesel cars, starting in 2040. That move, which apparently excludes hybrid cars, is further fallout from the 2015 Dieselgate emissions-cheating scandal.

Now it appears that China is preparing to issue a similar ban. With around 30% of global new-vehicle sales, China could upend the plans and economics of the world’s fuel and automobile industries. However, it is less obvious that this would lead directly to the arrival of “peak demand” for oil, an idea that has largely displaced earlier thoughts of Peak Oil related to supply.

Peak demand proposes that consumption of petroleum and its products will reach its maximum extent within a few decades, and thereafter plateau or fall. Crucially, it doesn’t depend on a single theory, but on a combination of factors that are easily observable, though still uncertain in their future progression: meaningful improvements in fuel economy, even for large vehicles; policies and regulations to decarbonize the global energy system in response to climate change; an apparent decoupling of GDP and energy consumption; and the rise of partially and fully electrified vehicles.

That brings us back to the implications of a ban on internal combustion engine (ICE) cars in China. Considering that China has accounted for roughly a third of the increase in global oil consumption since 2014, this has to be reckoned as one of the larger uncertainties about future oil demand. Even if we’re only talking about the equivalent of a couple of million barrels per day of lost demand growth by 2030, OPEC’s ongoing struggle to balance a market that has been oversupplied by less than that amount puts the potential impact for oil investment and economics into sharp relief.

It’s not hard to envision this point of view solidifying into conventional wisdom, with interesting implications. Among other things, it could result in further cuts to investment in oil exploration and production that various experts including the International Energy Agency already worry could lead to another big oil price spike–well before EVs take off in a big way. It could also reduce R&D and investment in improvements to the conventional cars that will account for the large majority of car fleets and new car sales for some time to come, with adverse consequences for emissions.

When I consider these forecasts I’m struck by how early we are in this particular transition. Global EV sales are still only around 1% of global car sales, and petroleum products account for all but a small sliver of the global transportation energy market. As fellow energy blogger Robert Rapier recently noted on Forbes, “China is a long way from reining in its oil consumption growth.”

Meanwhile, the nascent competition between petroleum liquids and electricity in transportation will occur against the backdrop of a much more complex reshuffling of the entire global energy mix. The current stage of that larger transition involves the rejection of coal and its replacement by natural gas and intermittent renewable energy: wind and solar electricity.

An excellent article by John Kemp in Reuters last week placed the shift away from coal in the context of a long sequence of historical energy transitions. As he noted, “Each step in the grand energy transition has seen the dominant fuel replaced by one that is more convenient and useful.” Although there are other, compelling rationales for a move in the direction of electric vehicles backed by wind and solar power, it is extremely difficult to see that combination today in the terms Mr. Kemp used.

Pairing EVs with vehicle autonomy might create a product that is indeed more convenient and useful than current ICE cars with their effectively unlimited range and short refueling times. Perhaps it will require packaging self-driving EVs into mobility-on-demand services to beat that standard. It remains to be seen whether such a package would be technically or commercially viable, since even Tesla’s “Autopilot” feature is still a far cry from such level 4 or 5 autonomy.

And even if EVs win the battle for car consumers with sustained help from governments, electricity is still an energy carrier, not an energy source. Renewables may go a long way toward replacing coal in the next two decades, but dispensing with both coal’s 28% contribution to global primary energy consumption and oil’s 33% in such a short interval looks like a massive stretch. Before the transition to EVs is complete, we may see at least some of them running on electricity generated by gas turbines burning petroleum distillates such as kerosene. (The environmental impacts of such a linkage would be significantly lower than running a fleet of EVs on coal.)

So while China’s likely ban on internal combustion engine cars certainly looks like a key step on the path to peak oil demand, it could just as easily force oil producers to find new markets. That happened over a century ago, when a much smaller oil industry saw kerosene lose out to electric lighting and was farsighted or lucky enough to shift its focus to fueling Mr. Ford’s new automobiles.

Peak demand for oil definitely lies somewhere in our future, regardless of China’s future vehicle choices. However, as a long-time practitioner of scenario planning, my faith in precise forecasts extrapolated from current facts and trends is limited. Whether we are close to peak demand or, as with a global peak in oil supply, continue to push it farther off, will remain subject to uncertainties that won’t be resolved for some time. Our best indication of either peak–demand or supply–will come when we have passed it. However, the idea of an impending peak has shown great potential to affect markets and decisions in the meantime.

https://www.bloomberg.com, http://energypost.eu


09-10-2017 17:26

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