Electric cars and oil prices: should investors be concerned?
What is more likely to cause a long-term collapse in oil prices – the electric car or the humble combustion engine?
If you were to judge solely by media coverage or perhaps even by gut instinct, you might well answer "the electric car". But you would be wrong.
So at least argues a single, thought-provoking paragraph from Deutsche Bank analyst Stuart Kirk. He notes BMW has said it will deploy 1,000 electric vehicles in Hamburg, India wants to lower taxes on them and “Canadians fret that battery-powered cars will destroy the Alberta oil-sands industry” yet “it is not falling gasoline demand from electric vehicles that oil investors should worry about – not yet anyway”.
Instead, Kirk argues, it is efficiency improvements to internal combustion engines. “Assuming electric cars can jump from 1% of global sales today to about one-third in 15 years,” he explains, “the 100 million electric cars added annually by then lowers oil consumption by 1.3 million barrels a day. In comparison, maintaining the current 1% rate of engine efficiency gains would moderate demand by three million barrels a day.”
What is more, when both factors are combined, it is not until the early 2030s that overall car consumption of gasoline even starts to fall.
So, while the narrative currently building up around the future of electric cars is huge and high-profile and easily captures the imagination, it is also, in comparison with other, far less attention-grabbing developments in the auto industry, essentially irrelevant.
Petrol and diesel engines still dominate
The crucial point here is not the growth being seen in sales of electric cars and their more traditional counterparts but simply that there are so many more petrol and diesel engine cars currently being driven around.
And while, according to the International Energy Agency, the number of electric vehicles on the world’s roads passed the one-million mark in 2015, that is less than one one-thousandth of the 1.2 billion motor vehicles estimated to be driving around at present.
Everybody loves a good story – and electric cars are certainly that.
Value investors strive to ignore stories, however, because they can serve to distract from what is really going on. In this instance, what is really going on is small, incremental efficiency improvements in internal combustion engines – while they may seem insignificant, they could end up having a significant impact on industries, business and investment returns.
- Nick Kirrage is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction.Click here and enter your email to receive a weekly round-up of investment ideas.
More posts:
- When to buy a company with a falling share price – and when not to
- The problem with 10-year fund performance tables
- Can this chart show what happens next to the stock market?
Important Information: The views and opinions contained herein are those of Nick Kirrage, UK Equity Value Fund Manager, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.