Oil industry has plenty of time before its own ‘iPhone moment’

The traditional motor industry, especially in Germany, has had a bad press of late. Just in the past week or so, we have read about allegations of cartels, the threat from the next generation of electric vehicles made by the likes of Tesla, the ongoing investigations into cheating on emissions by diesel manufacturers, and even a claim that the industry faces its very own “iPhone moment,” when newfangled technology will drive the old motor dinosaurs to extinction.

To cap it all, the governments of Britain and France announced that they would ban petrol and diesel cars completely by 2040, mainly on environmental grounds.

Although the Arabian Gulf might regard this as somebody else’s problem — there is little in the way of a motor manufacturing industry in the region — it nonetheless has a direct impact on economies and culture here.

For one thing, Gulf societies have historically been a paradise for car drivers, with wide open spaces, increasingly good transport infrastructure, and of course a cheap supply of petrol to keep it all going. In many parts of the Gulf, the obvious transportation model has been Los Angeles, the motor city par excellence.

Even more importantly, the level of demand for oil products from the motor industry has been the main driver of oil prices for decades. With personal transport fuel requirements accounting for some 26 percent of total oil demand — more than any other single category — the motor car with an internal combustion engine is still the most important factor in global oil demand, and therefore in pricing.

So there are two questions long-term economic strategists in the region need to answer: Is the petrol-fueled motor car doomed? And if so, will it pull the oil industry down with it?

Those who answer yes to the first question point confidently to the Tesla 3, the new electric vehicle (EV) made by Elon Musk’s California-based company. For a reasonable $35,000, you can get a state-of-the-art, high-tech, reasonably high-performance vehicle powered by cheap and clean electricity. Some 500,000 people have signed up for the first production versions of the cars.

Tesla was initially dismissed by the big motor industry as another idealistic dream that would never take off, but they have changed their tune since Musk was able to demonstrate that he could build a marketable product for which there was sufficient consumer demand to justify full-scale production.

This, if it happens, is the “iPhone moment.” When the likes of Mercedes, BMW, Volkswagen and Porsche realize that the road has been cut from under their wheels, like Apple’s revolutionary smart phone did to Nokia and BlackBerry in 2007, that will truly be the death knell for big motor.

All the traditional manufacturers have jumped on the bandwagon to some degree or other, either with their own EV versions or some form of hybrid technology that aims to get the best of both worlds. Even Aston Martin and Lamborghini, darlings of the petro-heads for generations, have announced plans for EV and hybrid cars.

With that tidal wave of inevitability, surely it is time to wind up the petro-motor industry altogether and commit mankind’s future entirely to electric?

But that would be to underestimate the size of the industry, and to misjudge the speed with which EV can make inroads into it. Two experts in the business recently put the issue into proportion.

Bob Dudley, chief executive of BP, has revealed his own internal forecasts: There would be 100 million electric cars on the road by 2035, according to his company. Even if that forecast is dramatically inaccurate, and the real number turns out to be 200 million, that will still leave 2 billion petrol engines chugging away round the world then.

Goldman Sachs put it another way: EV cars totalled 0.2 percent of all vehicles on the road last year; by 2030, they are forecast to account for just 5 percent. Developed economies in North America and Europe might be keen to switch to EV, but the fast-growth areas in Asia, Africa and Latin America seem quite happy to stick to the technology they know, the petrol engine.

The oil industry will take some comfort in this. The slower the emergence of EV technology, the later the date of “peak oil” demand. This is the date at which alternatives to oil will become more important than the black stuff itself, and demand (and prices) will enter terminal decline.

The problem is that nobody can say when this will be. Some energy experts put it in the late 2020s, others as much as 15 years later. Continuing demand from fast-growing economies, and the difficulties in replacing petrol as a fuel for aviation, shipping and manufacturing are all big variables that could put that date off even further.

In any case, most of the big oil companies are already investing their crude oil profits in technologies of the future, in anticipation of the peak. Saudi Aramco, for example, has a capital expenditure program of $30 billion per year for the next decade, much of which will be money spent on alternatives for oil, as well as more efficient and environmentally-sound ways of getting it out of the ground.