Though the prevailing belief in the oil industry is that Saudi Arabia’s refusal to cut its oil production is an attempt to drive out high cost shale oil, the real reason may be directed at a smaller target: electric vehicles. If there are breakthroughs in battery technology or if a viable charging station infrastructure establishes itself in North America, Europe or China, the value of Saudi Arabia’s 270-billion barrels of easily recoverable oil could quickly diminish, a situation foreshadowed when former Saudi oil minister Ahmed Yamani commented in 2000 that “30 years from now there will be a huge amount of oil and no buyers. Oil will be left in the ground.”
Currently hybrid/electric vehicles account for less than 1% of yearly vehicle sales in the U.S., but that sales growth rate has varied between 20% and 300% per year over the last four years, indicating the start of what may be an exponential growth trend typical of the public’s acceptance of a new technology. Whether it be telephone networks, computers, the electricity grid or even the combustion engine driven automobile, it takes seven to 10 decades for a technology to be adopted and made part of a country’s infrastructure. During the first three to five decades, the take-up of a new technology is slow as consumers become familiar with it and costs drop due to innovation. Then acceptance skyrockets. The modern electric vehicle with its lithium-ion battery is now close to four decades in evolution and on the cusp of such growth.
According to the U.S. Energy Information Administration’s McKinsey report, hybrid electric vehicles (with gasoline-assisted drive trains) are economically competitive with internal combustion engine cars when the price of gasoline approaches US$3.50-$4.00 per gallon, a range often seen over the last four years. The McKinsey report predicts that within 10 years, improvements in battery efficiency and production (bringing battery cost to US$250 per kilowatt hour) will make electric vehicles economically competitive with gasoline-powered models, but only if the price of gasoline remains above $3.50 a gallon. If the average price per gallon of gas stays at US$2 a gallon (where it is today), a three to four-fold lowering of battery cost would be required, a difficult objective given the slow pace of battery evolution. Low-cost gasoline could keep petroleum-powered vehicles economically attractive for three to four more decades, giving the Saudis and other low-cost producers ample time to monetize their in-ground crude.
Low-cost gasoline has already dented electric vehicle maker Tesla’s growth forecasts and January electric vehicle sales growth has slowed compared to previous years. As Karl Brauer, senior director of insights and senior editor for Kelly Blue Books, a respected California-based vehicle valuation and automotive research company said, “(The low gasoline price) has increased momentum away from electrics and hybrids.”
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For the Saudis, $55-a-barrel crude oil is still profitable and they have the capacity to easily raise their production from 9.8-million to 12-million barrels per day. With expansion of their pumping infrastructure to 16-million barrels per day and keeping crude in the US$55 range, Saudi Arabia could return to balancing its budget, run a surplus and sell a good portion of its in-ground crude over the next three to five decades. Oil at US$55 per barrel and gasoline in the US$2 price range spells difficulty for electric vehicle sales and growth. The only real challenges faced by low-cost energy producers is legislation of environmental standards that limit the use of gasoline-powered vehicles or a technological leap in battery efficiency. The former scenario probably is less worrisome to the Saudis than the latter, considering the inertia faced by governments balancing consumer demand with environmental issues. However, a technological breakthrough that substantially lowers battery cost would have an immediate effect on the exponential adoption curve. One only needs to look at the cell phone and computer industry to understand the power of innovation. What low-cost petroleum producers fear most is that electric vehicles will similarly evolve. To protect themselves, it makes sense to delay that evolution by producing high-cost gasoline for as long as possible.
John Sydor is a professional engineer and analyst specializing in the social and economic impact of innovative technologies. He is an associate with Gentium Research Consulting in Ottawa.