While BP assumes that only 15% of the car park will be electric by 2040, because the shared autonomous fleet is 100% electric with much higher utilisation, 30% of miles driven are electric7. The forecast has demand for transportation fuel broadly flat in 2040 versus current as the negative effects of efficiency, autonomy and electrification are offset by growth in global miles driven.
However, a more aggressive penetration of both electric and/or shared autonomous vehicles, as the energy system transitions, could mean a scenario where oil demand peaks in the next decade8.
Increased demand for metals
If fuel is the loser in this transition, metals and electrons are the clear winners.
There has been a lot written on the impact of batteries on metal demand with nickel, cobalt, lithium, graphite, manganese all included as major beneficiaries. With increased investment and innovation in battery research it is hard to predict which battery technologies will ultimately prevail and what their exact metal composition will be. However, with long lead times to commercial production, from exacting safety and quality standards, the overall composition of batteries over the next ten years is reasonably predictable.
As history constantly reminds us, it is not always the best technology that prevails but the most practical in terms of function, cost and security of supply. It is sensible to assume that companies will seek alternatives to cobalt, due to its concentration of reserves in the Democratic Republic of Congo – whose government has recently increased the royalties extracted from miners of the metal9.
These alternatives include lithium, which is abundant in many different geographies and geologies – from brines to clays to hard rock projects in North and South America and Australia – and which remains core to most technologies. Tesla favours nickel over cobalt for its batteries. Graphite is unusual in that it can be produced artificially and Syrah Resources, an Australian-based industrial minerals and technology company, is increasing extraction of natural graphite at its huge, high quality graphite mine in Mozambique.
The product quality required for batteries is increasing all the time – and this makes refining and processing critical to raw material suppliers and the value-in-use of the raw materials. For example, battery manufacturers are moving from lithium carbonate grades of 99.5% to 99.9% or moving to lithium hydroxide instead. This has major implications for miners as the cost of producing the higher qualities can depend not only on the raw material but also the types of impurities contained in it. In fact, mining raw materials is often the easiest part – for brines it is just pumping – whereas processing and refining is now comparatively far more critical to the success of the project. It even begs the question as to whether lithium is really a mining industry activity or is it more suited to chemical companies.
The implications are significant. If 18% of new car sales are electric by 2025, then electric vehicle batteries would constitute more than 80% of lithium and cobalt demand, 40% of graphite demand, almost one third of nickel demand and about one twelfth of copper demand10, with further growth as penetration accelerates.
Changes in the electronic architecture of the cars and battery chemistry can significantly change the outlook for metals demand. Higher voltage EVs use significantly less copper – with Porsche’s Mission-E 800 volt architecture using less than half of the copper of today’s lower voltage electric vehicles. Moreover, Tesla has made a commitment11 to reduce cobalt to ‘almost nothing’ and the industry as a whole is moving gradually away from cobalt, partly because of the significant ESG issues around sourcing the metal sustainably.
The battery of the future | storing 50kWh of energy requires:
Source: Bosch, Research & Technology Centrer, 2018
Looking much further ahead, the growth of autonomous vehicles will mean the number of cars in circulation decreases as utilisation increases. But at the same time, we would expect replacement cycles to speed up as car life is correlated with miles driven as much as age.
Renewable energy becomes the fuel of the future
The utility sector is a potential winner in the changing energy mix.
Over time, electrons will take share from fossil fuel as transportation, heating and low temperature industrial processes all need to electrify if we are to meet our carbon reduction goals. However, the incremental electricity demand from electrifying transportation is not as significant as perhaps some might expect because the electric motor is almost four times as efficient as the internal combustion engine.
Hypothetically, electrifying the entire car park population in the United States would result in less than 30% incremental electricity demand growth. The impact on peak power demand and last mile networks, namely the final stage of the delivery journey to users, could be more significant should everyone decide to charge their cars at once. However, a smarter grid and enabling EVs to communicate with the power grid to return electricity should ultimately allow electric vehicles to help stabilize the electricity grid.
Utilities are also the main investors funding the rise of renewable energy, but are also the biggest owners of increasingly uneconomic fossil and nuclear capacity. Some of the more forward-thinking firms in the sector are already well into this energy transition and have established a competitive advantage in building renewables, either through fast adoption of new technology such as offshore wind or early investment in development sites, on which they can construct renewable assets. Regulated utilities with constructive regulators in general should have an easier transition and will see a prolonged period of growth in grid investments to facilitate intermittent renewables and electric vehicles.
How fast will change happen?
Oil forecasters suggest that EVs will reach 50 million users between 12 and 20 years from now. But this could happen more quickly – especially given the hand-in-glove relationship between EVs and autonomous vehicles. In our view, there are four compelling reasons:
1) Why not buy an EV moment?
One factor is cost. At $850 in 1908 the Model T was significantly more expensive than the average horse which ranged in price from $25 to $20012, whereas the upcoming electric vehicles will be priced in line with internal combustion engines.
Source: US Census Bureau and Burstein analysis, 2018
2) Adoption cycles are speeding up
It’s also probably fair to argue that generically product cycles have speeded up since then. Recent consumer tech has shown much faster adoption curves.
Another is the network effect. Figure 8 looks at how long different technologies have taken to get to 50 million users. What we see is that for airlines, automobiles, electricity and telephones which started life in the first half of the last century, it took approximately 50 to 60 years. For credit cards and television, where adoption curves started in the sixties, it took about 20 to 30 years. For computers and mobile phones in the nineties that fell to 15 years, and the internet took seven years to get to 50 million users.
How fast will electric vehicles take share?
Forecasts are inherently limited and should not be relied upon as an indicator of the future
Source: Visual Capitalist, BoAML Global Research (October 2018). Reference year for Electric cars is 2012, the year the Tesla Model X was launched.
We have looked at current projections for EV adoption and measured the same metric, using 2012 as the start date (the year Tesla launched the model 3), and found that big oil’s forecasts look very conservative and even Bloomberg New Energy Finance, which is considered to be the most aggressive forecaster in the market, is not out of line with adoption curves for other technologies.
Potentially more interesting is when we look at the far right of the chart and review the technologies where adoption has been almost exponential. Pokemon Go took 19 days to get to 50 million users because of the huge network effects inherent in the business model. This demonstrates the impact of what is known as Metcalfs Law: “the value of a network is proportional to the square of the number of users”.
There are huge network effects inherent in any shared autonomous fleet business model and hence we see potential for accelerated adoption once fleets are rolled out more widely. Without the fuel and the driver, fleet economics for robotaxis are driven by percentage utilisation. Hence, there will be an arms race to build out fleets and grab digital real estate on the smartphone homepage and ultimately market share. It is interesting to note that all the key participants - Google/Waymo, Apple, GM Cruise/Softbank and Didi Chuxing are only looking at building out autonomous electric fleets.
3) Does it make sense to own your vehicle?
A third factor is unit economics. The way consumers’ access mobility is being disrupted. if we take the economic argument to its logical conclusion, consumers should choose shared mobility over vehicle ownership and the industry should attract operators to compete for the USD 0.46 per mile saving, which is the revenue and profit earning opportunity.
For the unit economics to make sense, namely bringing the autonomous car not just below the traditional taxi (which on a cost per mile basis is the most expensive way on earth to get around) but below the personal car, we need to lose not just the driver but the fuel as well. Ride sharing in the US in 2018 costs around $1.50/mile13, of which about $1.10 goes to the driver and $0.1014 to the oil company. This $0.10 falls by more than half when the car is electric, and gets to c.$0.46 matching many existing forms of public transportation.
Cost of various forms of transportation ( price per mile )
4) The auto industry is adapting… fast
A fourth factor is that the auto industry is now at a point where a crossover between the cost curve of the internal combustion engine and the electric battery is inevitable and expected to occur in the early 2020s.
At this point, broad electric vehicle adoption will make sense not just on a regulatory basis, but on the basis of the economics of production as well.
The cost of manufacturing internal combustion compared to EVs
The long term vision – is the future autonomous
Returning to our starting point, as Google’s Waymo, General Motor’s Cruise as well as Apple all launch test fleets of fully autonomous vehicles, we are inclined to keep Steve Jobs’ mantra in mind when thinking about the business model for this next stage.
Autonomous vehicles can change personal mobility
Self-driving technology enables a vehicle to operate without a driver – along with electrification, this is required to provide the opportunity for shared mobility to proliferate. At the centre of this project is sensor fusion, which is a combination of machine learning and artificial intelligence which fuses together inputs from tens of hardware components, such as cameras and radars. With this information, a course of action is then determined and implemented by the vehicle, without the use of a driver.
This is a quantum leap from the assembly plants of Detroit which is why companies from Silicon Valley with more adept skills are entering the industry.
How self-driving technology works
Source: Texas Instruments & Investec Asset Management, 2019
There is effectively now an arms race to develop self-driving technology. The participants can be categorized into traditional auto component and manufacturing companies in one corner, and the Silicon Valley disrupters – those with specialisms in artificial intelligence or shared mobility – in the other corner. Traditional auto manufacturers do not have the requisite expertise in artificial intelligence, and the technology companies do not yet have sufficient expertise in auto manufacturing.
Consequently – and with rare exception, such as GM – these gaps in expertise have led to mass collaboration across the industry in a way which is unprecedented for any technological change which has gone before.
It may well be that the next generation will view personal transportation quite differently to ours. Widespread individual car ownership may become a thing of the past regardless of what the market research says. Instead autonomous vehicles may well be a truly disruptive innovation. Seamlessly integrated public and private transportation, all controlled via a smartphone, with options for private or public pods depending on the situation, could be ‘good enough’ for the vast majority of the market.
As we produce this research, 50% of car buyers are under 5015, but 90% of Uber users are under 5016, and the global car fleet is one of the world’s least sweated assets, with average utilisation under 5%. We may well look back at this brief hundred-year hiatus between horse and robot where humans were allowed to drive life-threatening carbon-spewing machines as an anomaly in the history of how we move ourselves around.
1 Source: https://www.thoughtco.com/history-of-transportation-4067885.
2 Source: NIO IPO Prospectus.
3 Source: September 2017 speech by Xin Goubin, vice minister of industry and information technology.
4 Source: Barclays June 2018.
5 Source: Handlesblatt.
6 Source: Alix Partners, 3 July 2018. https://www.alixpartners.com/media-center/press-releases/uk-release-the-alixpartners-global-automotive-outlook-2018/
7 Source: BP energy Outlook 2040.
8 Source: Bernstein equity research.
10 Source: UBS Equity research.
11 Source: https://www.ft.com/content/1c154770-4eb6-11e8-a7a9-37318e776bab
12 Source: Bernstein equity research
13 Source: Evercore ISI.
14 Source: https://www.afdc.energy.gov/fuels/electricity_charging_home.html.
15 Source: https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/the-young-and-the-carless-the-demographics-of-new-vehicle-purchases-20160624.html.
16 Source: http://www.businessofapps.com/data/uber-statistics/.