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The sluggish EV revolution

The switch to EVs will be slower than widely predicted—unless China takes the plunge

Electric vehicles (EV) are surging" is a headline we've often read over the past year. It seems inevitable: the electric-car revolution is around the corner and the end of growing oil demand is nigh. Yet global oil consumption continues to rise, predominantly driven by low oil prices and strong demand from the transportation sector.

None of the fundamental shortcomings of electric cars has been eliminated over the past year: there hasn't been a breakthrough in battery technology and it's unlikely we'll see one in 2018. EVs are still heavily reliant on government subsidies and will remain so. Even with today's low number of electric cars, the inadequacy of charging infrastructure is already a limiting factor. Low oil prices will continue to keep gasoline affordable, slowing down the switch to electric cars.

What's changed in 2017 is the attitude of governments, with European countries like France, the UK, and Netherlands leading the way with plans to ban petrol and diesel cars in the future. In most cases, though, the proposed bans won't include hybrid cars with an internal combustion engine. The underlying message still is that government policy, rather than economics, will be the biggest driver of electrification.

In the meantime, energy density, range, charging times and production costs remain big challenges for battery technology. In the absence of a sufficient charging infrastructure and with some 80% of charging done at home overnight, electric cars are far from gaining market share where they're needed most: in dense cities with polluted air. Even in global EV-leader Norway, people must have some means of home charging before they can buy an electric car, as public chargers in cities are in use 24/7. The excitement around Shell's announcement of new charging stations in the UK ignored the fact that charging an EV there will cost as much as filling a tank with petrol, with, at best, a 20-times longer wait and only half the range of a car with a full tank.

Our analysis indicates that significant reductions in battery costs may not happen because prices of raw materials are likely to rise strongly due to higher demand. This will make electric cars even more reliant on government subsidies. Governments' commitment to subsidies will be tested significantly in 2018, after Norway's recent decision to introduce a tax on heavy electric cars.

From an oil-demand perspective, the key metric is the increase in absolute numbers of vehicles, not percentage growth rates. During the first half of 2017, SUV sales in the world's top three car markets (China, the US and EU) were up 11% year-on-year, while plug-in-vehicle sales grew 35%. In absolute terms, though, growth was 1.2m SUVs against 91,000 plug-in cars.

The top three best-selling cars in the US—Ford's F-Series, Chevrolet's Silverado and the Ram Pickup—sold a combined 1.5m units during the first nine months of the year, compared with 330,000 plug-in cars there. This trend will continue globally in 2018, further supporting oil-demand growth.

EVs will gain market share in the long run, but many underestimate how slow the transformation will be. Diesel cars in Europe needed 20 years to increase their fleet share from 10% to 40%—with existing infrastructure (service stations), mature technology (diesel engine) and government support (low diesel prices). For electric cars, it would take even longer without governments' support.

So we think the biggest wildcard in 2018 will be China, which announced a future ban on petrol cars, but without specifying a date. China has accounted for 40% (2m barrels a day) of global gasoline-demand growth since 2002 and accounts for one-third of global car sales, at around 25m a year. Consequently, a Chinese ban on internal combustion cars would singlehandedly reshape the global car industry, potentially paving the way for accelerated electrification of road transport as a whole.

Beyond 2018, we project a peak in global gasoline demand after 2030—but resulting from gains in fuel economy, not from electric cars. In the end, the internal combustion engine could still enjoy a long life. For we may well see (plug-in) hybrids—combining the best of both worlds and not subject to government bans—gaining a larger market share than battery-powered EVs.

Cüneyt Kazokoglu is Head of Oil Demand Forecasting and Long-Term Service at consultancy FGE

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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