Electric Vehicle adoption an increasing threat to oil demand, says Fitch

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KUALA LUMPUR (Feb 21): Electric Vehicle (EV) adoption is an increasing threat to oil demand, which could plausibly peak before 2030, according to Fitch Ratings.

In its report titled “Batteries Update: Oil Demand Could Peak by 2030” released yesterday, Fitch said this was not its core scenario, but developments in 2017 show how technological changes and greater product awareness could lead to annual sales of 10 million battery-powered EVs by 2025.

Fitch said last year saw a slew of EV product announcements driven by technological advances such as the continued decline in battery costs, consumer preferences and environmental policy.

It said governments and manufacturers have set EV targets.

“OPEC has raised its forecast for the size of the EV fleet in 2040 to 250 million units from 140 million, and other forecasters have disclosed EV penetration assumptions for the first time,” it said.

The ratings agency said the path of EV sales relative to Internal Combustion Engine (ICE) vehicle sales will depend on how far consumer behaviour and public policy goals support the heavy investment in EV production needed to meet bullish estimates.

“But by considering a scenario where EVs' cost and range are comparable to ICEs, consumers prefer driving EVs, policymakers mandate and support electrification, and carmakers see cost benefits of focusing on one drivetrain, it is not unreasonable to expect global EV stock by 2040 of over 1 billion, or more than half the vehicles on the road.

This is not our core expectation. The pace and pattern of EV adoption will be more nuanced. Manufacturers have a history of missing big strategic targets, the development of charging infrastructure remains a key uncertainty, environmental impact assessments and policy could change, advances in battery technology may slow, and ICE technology may itself adapt,” it said.

However, Fitch said it believes the new extreme scenario has become more plausible over the last year.

“Applying it to oil demand, in combination with International Energy Agency's (IEA) New Policies Scenario assumptions on non-transportation use, shows oil demand peaking in 2029.

“Even then, the peak is shallow, with oil demand in 2040 broadly unchanged from today, as the world still needs to consume vast amounts of oil,” it said.

However, Fitch said the absence of rising demand would be a significant structural change for the oil market and could make prices more volatile and, on average, lower.

It said most large oil companies are taking steps to diversify into natural gas, petrochemicals and alternative energy.

“Our ratings already take into account their production cost position, which is key in any market but would be even more important if demand weakens,” it said.