What Price Oil?

The news over the weekend about a drone attack on Saudi Arabia’s oil infrastructure may cause a disruption in supplies to the world. Saudi Arabia produces roughly 10% of the world’s daily need, and up to half of that may have been disrupted by this attack; some theorise that redundancy in their infrastructure may mean that normal supplies will be resumed within days, perhaps as soon as Monday.

But what would the oil price need to be to change consumer behaviour? How much would a litre of petrol need to cost before there was a wholesale switch to mass transit, or to EVs?

With roughly 61% (the highest in the EU) of the price of unleaded petrol going to the government in tax (a mix of fuel duty and VAT), increasing prices at the pump directly increase revenues to government, provided consumer behaviour doesn’t change (shorter journeys, lower use of cars etc).

The government will take in £28.4bn this year in fuel duty, not including VAT. As I’ve written before, even a move to 10% EVs makes a significant dent in tax revenue. A bigger move makes a huge hole in spending plans.

Unless, of course, government moves to plug that gap by taxing EV mileage. The sooner such a plan is made clear, the easier it will be to calculate the benefits of an EV versus a petrol car, especially if petrol prices begin to increase in response to both actual and potential threats.

From Lithium to Hydrogen

A few years ago at a conference on Electric Vehicles I posed the following question

If we believe the following three things

1) EVs are the future and will quickly displace diesel and petrol cars

2) EVs will usher in autonomous cars but we don’t yet know when

3) The arrival of autonomous cars will accelerate an existing trend of lower car ownership and introduce broader car sharing and subscription models

Then

1) how much should we invest in wiring the U.K. to support widespread and local charging of EVs?

2) when should we switch our investment plan to cater for AVs that drive themselves to a charging spot (and so are in in use perhaps 70-80% of the time) and that don’t need to be parked outside a house (unused 90% of the time)

3) what would we do with the space that was freed up, particularly, say in the streets of South London where single lane roads with two lanes of parked cars would suddenly have wide streets, no longer need traffic control measures and would be safe for the young and the old to wander around in?

There is no easy answer to those questions. We are so early in the world of EV take up, not just in the U.K. but elsewhere (though other countries – Norway and China for instance are far ahead). There are plenty of scenarios, of course. My sense is that we are only really dealing with Q1 above as everything else likely falls into the top hard box.

There are lots of challenges with EVs. I’ve written here about some of them over the last 12-18 months.

One of the bigger challenges is around the ethics of the components that are used in EVs, particularly around where many of them come from and how they are mined or produced.

An EV needs nearly double the amount of copper a traditional car uses. Cobalt is physically mined by huge numbers of workers, often involving child labour; death rates are off the scale. Lithium is perhaps a little better, but not much, and if delivered at the volumes needed to put a battery into every car, would be worse. There are plenty of other rare earth materials involved – all of which are also used (in vastly different quantities at an individual level but huge quantities at a macro level) to make jet fighters, mobile phones, submarines and computers.

What then, if we asked a different question and said “what would it take to make hydrogen a viable fuel source?” and when could we, or should we, make the switch to backing that as the best option?

Norway is already trialling this. Japanese car makers have long been sceptical of EVs (notwithstanding the hybrid Prius and the Leaf EV) and have invested heavily.

The big cost is affordable extraction using solely renewable energy sources. The big challenge is likely erasing memories of the Hindenburg from the minds of potential customers.

But what if?

Exit Through The App

This sign greeted me earlier

Pay with the app … but only when you’re inside your car. Long ago it was thought that a mobile phone could cause a spark at a petrol station (one would imagine a far greater chance of that with vehicles moving through the petrol station of course).

Now it seems to be to avoid people being distracted – staring at their phone as another car bears down on them perhaps.

We don’t really need this sign in petrol stations – we need it at zebra crossings, on stairs to and from tube stations, on every pavement in the land etc.

But, of course, we would all ignore it in those places too.

When petrol and diesel pumps are replaced by EV chargers … will we still worry about mobile phones causing sparks and being a source of distraction?

EV Sales

Pure battery EV sales in August, a slow month (because new registrations come out in September and, for some reason, we still like the prestige of a “new new” car rather than an “old new” car) showed amazing interesting increase, though market share is still only just over 1%. There’s a long way to go to match the hockey stick predictions … but lots of new models due over the next 18 months. Inside those BEV numbers is, I believe, the newly launched (in the UK) Tesla Model 3 which apparently made up 2,082 of the vehicles sold (this is 3rd in total sales behind the Ford Fiesta and VW Golf). One swallow doesn’t make a summer and all that … but the beginning of a trend?

Diesel remains the new tobacco where owners are increasingly relegated to car parks out of town and houses at the far end of the street. We can call it Big Diesel. Like Big Tobacco. And Big Sugar.

Soon showrooms will relegate diesel go the outer lots and then only for special orders. What does this do to Land Rover? Will those in rural areas continue to buy diesel because traffic density is lower and pollution lower? What kind of 4×4 would it take to make the difference?

Car sales, though, are down. And going further down. Car ownership is not the thing it was. Second hand car values could struggle soon … meaning PCP finance deals (often held by a subsidiary of the car maker) could leave the finance company holding the bag. And that would mean less money for investment … and some write offs.

And Germany is already struggling. Could this push their finances over the edge?

UK Oil Refineries, Brexit … and Electric Vehicles

Reports in the last couple of days have said that some UK oil refineries could close, at least temporarily, and perhaps permanently if a hard Brexit meant that oil-based products were important tariff free (all the more so given that exports from those refineries would have tariffs imposed).  This is because the government has announced, though doubtless subject to change, that the tariff would be reduced to zero; exports would likely have a tariff of just under 5%.

According to an MSN report, the 6 refineries currently operating produce about 400,000 barrels a day of gas, and export about 30% of it.  Commentators speculate that cost reductions would be brought in and that any closures would be short term. 
There is, though, a bigger problem.  According to the UKPIA (Petroleum Industry Association), the downstream oil industry is important to the UK:

The sector contributed £7.7 billion directly to UK GDP in 2016 and supported directly and indirectly 300,000 jobs, as well as enabling all other key sectors of the economy – from chemicals and other manufacturing to almost all transport-related business – to grow.

and that’s backed up by this picture:
46 billion litres of oil products consumed by road vehicles (taking the picture literally, cars, buses and vans/lorries, both petrol and diesel).  A further 7.2 billion litres of oil were used to manufacture petrochemicals that then find their way into all kinds of things – clothes, electronics, paints, tyres and so on.
The thing is that these refineries produce lots of products, but many are side effects from their scale business – that is, refining products to be used as vehicle fuel.  As the move to EV gathers, ahem, steam, it’s easy to see that there is a loss of that scale, which will mean that the other products are either produced less cost effectively or, perhaps, not cost effectively at all.
It’s hard to see when this change takes effect, and it will likely be just the way Hemingway went bankrupt – gradually then suddenly – but it’s coming soon.  Some of those 300,000 jobs … and perhaps quite a lot of them are going to go away.  A strategy would be good methinks.

The Future of Filling Stations

According to Zap-Map there are 9,328 public charging locations, 14,821 devices (individual charging stations, so 1 1/2 per location) and 25,225 individual connectors (nearly 2 per device), for Electric Vehicles as of 18th August 2019.  Those numbers will change by the time you look at the link – roughly 1 new location is added per day (based on figures over the last year).

For comparison, there are 8,398 filling stations in the UK, according to Statista.  Let me call them petrol stations; it’s just how I think of them.

A filling station might still have perhaps 6, 8, 10 or more individual pumps, so there are still more “places” to fill your diesel/petrol car than places to charge it.  But the filling station count is falling (down from 12,500 in 2000) and the charging point count is plainly rising.  Average annual mileage is falling at the same time as the car count is falling.  There’s less demand for fuel, before the switch to EV is even considered.

Maybe there’s a better number for potential EV charging points. There are c20m homes in the UK, and around 27m households, according to the ONS.  Some 60% of those have off street parking and so can, in theory, charge an EV without a cable dangling across the pavement, waiting to trip up some unsuspecting soul.   The 40% without off street parking will likely have to wait for chargers to be installed in lamp posts, their streets to be dug up to lay new charging points or autonomous cars that can drive off and charge themselves.  Or will have to charge at work, the supermarket or elsewhere.  It’s not a good solution and it will slow adoption in dense urban areas I’m sure … but people living there may be the very people who are opting out of car ownership altogether.

That means that there are, or could be, 12m charging points, plus the 10,000 (and growing fast) public charging points.  That’s important because, assuming you park your car at home at the end of every day, or at the end of every journey, it’s full of “fuel” the next time you want to take it out.  No need to go anywhere, at any point, to charge your EV for perhaps 90% of the journeys that are made day to day.  If your office and the supermarket have charging points, you may never charge anywhere else for most of your journeys.

This suggests that as EVs become more common, local petrol stations will need to fight for a role.  They are already mini-markets, newspaper stores, car washes, air pumps, ice cream sellers and so on. There isn’t much space, in most, to support an EV needing to charge for even 5 minutes, let alone, 10, 15 or 20 minutes.

Long journeys are mostly made on motorways which suggests that service stations will dominate charging – they have the space for multiple, high power chargers, and they have the space to entertain you and the family for longer than you need for a bio-break.

As well as the £28bn of fuel duty that will be lost, until it’s replaced by some other charge, government needs to think about the loss of jobs and revenue from petrol stations.  Rural communities, villages and even small towns, may lose another anchor tenant – the post office and bank have already gone.  What happens if the petrol station goes too?

UK Car Industry – What’s the Strategy?

Any meaningful change in the shipping volumes of Electric Vehicles in the UK is going to have a huge impact on workers in the car industry who are based here.  Some figures, from the SMMT (a car industry lobbying group, presently focused on telling us all that diesel is fine (i.e. government has orchestrated a scare campaign about its nasty effects), that Brexit will be a disaster and that we should, of course, be buying more cars):

They publish a handy booklet that contains more information.  Some of the numbers are different, eg. the picture above (which is in the booklet) claims 856,000 workers, the table below that picture in the same booklet says 823,000 (my sense is there is both 2017 and 2018 data mixed up throughout).

There are a couple of numbers that I suspect are more important than the others.

1. 2,722,325 engines built (in 2017)

2. 1,334,538 cars exported (out of 1,671,166 built and 2,540,617 registered)

That is, we build engines for a lot of cars that are not made in the UK.  And we export about 80% of the cars that we build; and we import pretty much as many as we export.

Plainly, as we, and the rest of Europe (and the world) switch to EVs, that number of engines built is going to fall, probably quite dramatically. There are many countries with far more aggressive targets for EVs than our own, of course, and they will stop buying engines far more quickly than we in the UK.  Maybe 50% of those engines are diesel (the overall number of diesel cars purchased has fallen in the last 2-3 years, perhaps by as much as 40% but some car makers, Land Rover, for instance, are still heavily dependent on diesel) – and those will therefore stop being built far faster.  The recent introduction of the WLTP test has done little to help the car industry.

If you play in

– the increasing trend of teenagers and young adults to skip driving lessons and the ritual of trying to pass your driving test (in an urban centric model of better public transport, Uber and other things to spend money on, why would a car be high up the list of wasting assets to purchase?)

– the use of PCPs as a profit centre (I’m told that the entire profit on a new car comes in the arbitrage between interest rates as car companies increasingly finance their own sales) which is going to hurt as the second hand value of diesels falls precipitously (first) and then, later, as petrol cars go the same way (whether replaced by hybrids or pure EVs)

Car purchases are likely to continue to fall, even before we get into the potential for “connected and autonomous vehicles” as the SMMT refers to them (they don’t mention EVs in the booklet).  They will bottom, of course, but it doesn’t feel like they bottom with the same number of employees as we have today.

Similarly, if other countries are buying increasing numbers of EVs, they’re not making the cars that we are building today.    This is why car companies are trying to outdo each other by striking partnerships, link ups, buying each other and investing ever increasing numbers of billions in EV capability.

There’s also some worrying data presented.  The picture below, notwithstanding that the headline suggests CO2 emissions were 8.3% lower in 2018 for new cars, also says that emissions for newly registered cars rose 2.9%.  Confused?  I am.  Mort importantly, the EU target for just 2-3 years away is more than 30% below current emissions levels (and the chary handily says that we have reduced emissions by about that much since 2000, i.e. in 18 years.  As I’ve written here before, if the car companies don’t hit that target, they get fined – that’s one of the reasons for the partnerships (the theory being that the emissions target will then be averaged across the whole fleet and so come down if e.g. a company that makes small cars partners with a company that makes larger vehicles).

The booklet notes £3.75bn is invested annually in R&D in the UK.    Most of what, I assume, is in the vehicles of today, though it must be switching, pretty rapidly if they can see the same data presented here, to an EV focus.

What then, is the strategy for the car industry in the UK?  In a market where there is a rapidly declining requirement for “engines”, a falling need for new cars altogether and an increasing focus on EVs?