IN LIGHT OF FALLING OIL PRICES AND GOVERNMENT MOVES TO VEHICLE ELECTRIFICATION, DAVID ADAMS EXPLORES WHAT THIS MEANS FOR GASOLINE-POWERED VEHICLES
I had the good fortune of attending the Toronto Global Forum of the International Economic Forum of the Americas in early July. I heard from a wide variety of significant public and private leaders about the current challenges facing the global economy, and trends that will shape and influence the global economy heading into the next few years.
Certainly the organizers couldn’t have picked a better time for an international conference on the economy.
With the unprecedented referendum in Greece just prior to the start of the forum, the Eurozone and the global economy were in uncharted waters, with no clear resolution in sight.
Add to that the meltdown on the Chinese stock exchanges which saw the Shanghai Composite Index fall by some 30 per cent in the last month, while the more speculative ChiNext Index lost more than 40 per cent of its value over the same period of time.
Granted the Chinese stock markets had previously risen over 100 per cent over the course of the past year. So a $3-trillion hair cut may sound like a lot (and it is) but it may not be the end of the world for investors that are still up 70 per cent.
While I was only able to attend a few of the sessions of the forum, it was interesting to observe that against the backdrop of these two major economic crises, so many of the sessions were focused on energy and its linkages. They covered not only the economy but also climate change.
Unlike the economic events that unexpectedly converged around the dates of the forum, the Climate Summit of the Americas was planned in conjunction with the Toronto Global Forum to allow a number of the keynote speakers at one venue to cross the hallway at the Royal York Hotel to participate in the other.
One such participant in both events was Quebec Premier Philippe Couillard, who spent a significant amount of his time talking about the importance of taking significant action to address climate change. This is in order to hold the increase in global mean temperature resulting from greenhouse gas emissions to two degrees Celsius, which is the limit most view as necessary in order to avoid severe consequences associated with climate change.
In discussing the need to shift energy use away from fossil fuels Premier Couillard commented that the “Stone age did not end for lack of stones, but rather because of innovation.” He applied the same logic to fossil fuels, suggesting that the world would not run out of oil but will have applied innovation in necessarily transitioning to other energy sources, notably for transportation.
Interestingly, Premier Couillard also highlighted statistics from the International Energy Association, which suggested there appears to be the start of a decoupling between economic growth and emissions. According to the IEA the global economy grew by three per cent in 2014 while emission levels stayed flat.
The IEA noted this was the first time in 40 years (aside from periods of economic crisis) that this has occurred.
The Quebec Premier also commented that Quebec is looking to capitalize on its abundant hydro-electric power resources to electrify transportation in the province. It is expected that over the coming months the Premier will release the government’s Transportation Electrification Action Plan, which will elaborate on his government’s plans in this regard.
So is Quebec’s proposed transition to transportation electrification a microcosm of what is taking place in the broader global marketplace? Is this the beginning of the end of oil? I think the answer is probably not.
For instance, the BP Energy Outlook 2035 issued in January 2014 suggests that transportation demand will be dominated by oil (87 per cemt) out to 2035.
Further, the dramatic decrease in the price of a barrel of oil — from over $100 per barrel last June to below $50 per barrel in early 2015 — makes the ongoing cost of “traditional’ transportation that much less expensive than the cost of “advanced technology vehicles,” such as pure battery electric vehicles or plug-in hybrid electric vehicles.
Energy experts at the Toronto Global Forum were suggesting that oil may stabilize between the $65 and $75 per barrel price over the course of the next couple of years, while Brent crude currently sits at slightly under $59 a barrel.
The IEA indicates in its special report that the drop in oil prices has resulted in a 20 per cent reduction in upstream investments in oil in 2015.
As a petro-currency, Canada and Alberta especially have felt the brunt of the lower oil prices, with investment in Alberta’s oil sands falling 25 per cent from where it was a year ago, according to an article earlier this year in The Globe and Mail.
Falling oil prices have also contributed to the devaluation of the loonie and Canada’s record trade deficit that sat at $13.6-billion through May, with May’s deficit alone being the second largest on record at $3.34-billion.
That said, the IEA noted in its recently released special report “Energy and Climate Change” that the transport sector is the second largest emitter of greenhouse gases after power generation, accounting for more than one-fifth of global energy-related emissions. That’s more than double the level from the 1970s.
The report further notes that 80 per cent of the growth of these emissions is from passenger and freight road transport. Both the BP Energy Outlook 2035 and the IEA reports indicate the global vehicle population will more than double between now and 2035.
Therefore, transportation will need to move along the road towards decarbonization, if it is to shrink its contribution to the growth in global greenhouse gas emissions.
While there are many technological solutions to decarbonize transport, electric vehicles seem to have captured most of the attention over the past two or three years.
But the IEA special report also highlights that the sale of electric vehicles globally has been slower than expected. Policy targets set for all regions of the world for 2015 are likely to be missed along with those for 2020, without additional support measures.
For consumers the current challenge around electric vehicles is related to cost and convenience.
While electric vehicles hold a clear advantage in terms of lower life time cost of ownership, most consumers do not look further than the sticker price of the vehicle which — even in jurisdictions with a government purchase incentive — is considerably more than a typical internal combustion engine vehicle.
The additional cost can be largely attributable to the battery. Although the prices have come down rapidly from $1200/KWh about 3 years ago to about $400/KWh now — it still means that a 16KWh battery equates to about $6,400 of the price of the vehicle. The sweet spot to make electric vehicles comparable in cost to “traditional” vehicles is reportedly about $150/KWh.
The charging infrastructure for electric vehicles is better — especially in Quebec — but is still not as robust as it needs to be to alleviate range anxiety.
Battery technology can assist in this regard as well but with rare exception pure battery electric vehicles have a range of around 120kms — 150kms. However, batteries with increased energy density should largely address this issue in the next couple of years.
Are we in the beginning of the end of oil? Possibly, but it seems clear that gasoline powered vehicles will be with us for the foreseeable future.
