Navigant Research Blog

Unexpected EV Demand Has Automakers Looking to Lithium

— April 25, 2016

Electric VehicleWith the rush to reserve a Tesla Model 3 nearing 400,000 global pre-orders, the electric car race is on. This race is not characterized by vehicle speed but by range and cost. More than 200 miles of range at a price of under $40,000 has been the target for the initial market entrants since the first generation of modern plug-ins was introduced in 2010. Automakers that reach this threshold quickly will benefit greatly by seizing market share, establishing brand recognition, and, most importantly, creating advantageous supply chain contracts. Automakers slow on the take will find breaking into the plug-in market increasingly difficult, much in the same way that few automakers have made headway with hybrids besides Toyota and Honda.

Underestimated Demand

The response to the Model 3 is unheard of in the modern automotive era. However, Tesla isn’t the only electric car maker observing greater than expected demand. In February, a BMW spokesperson acknowledged that the company “just massively underestimated demand” in regards to the company’s plug-in hybrid electric vehicle (PHEV) 3 series variant, the 330e, in the United Kingdom. A month prior, General Motors (GM) affirmed its upcoming 200-mile range battery electric vehicle (BEV) will not be production-limited, and a volume of 50,000 Bolts in 2017 is possible if demand supports it.

Though plug-ins have met global light duty vehicle (LDV) markets in varying degrees of success, unanticipated demand is not new to the plug-in market. In fact, the most glaring example of the demand/supply imbalance has been going on for the last 3 years as a manifestation of Mitsubishi’s inability to introduce the Outlander PHEV to North America due to unexpected demand in Japan and Europe.

Looking to Lithium

Recognizing that annual sales of plug-ins are going nowhere but up, some automakers are thinking ahead and diving deep into the battery supply chain to secure raw materials before prices become a problem. Despite a general dive in global prices of oil, gas, and mineral commodities, lithium prices have been resilient and robust.

Lithium is a core component of batteries for mobile devices, EVs, and grid-tied or residential energy storage applications. With no clear alternative, Navigant Research anticipates lithium demand (and therefore prices) will rise substantially over the next decade. Within the battery, a lithium-based compound is layered onto the cathode and the battery is filled with a lithium-based electrolyte. In total, Navigant Research estimates lithium materials make up around 10% of overall battery production costs. All things being equal, a doubling in the price of lithium would mean a 10% increase in battery production costs.

Price increases from materials may be easily absorbed by battery makers as costs are cut elsewhere through economies of scale or energy density improvements. However, automakers that can help their suppliers hold raw material battery costs low while the market is in its infancy will likely achieve significant advantages over emerging challengers and witness Prius-like success in a technology segment with much more growth potential.


Here’s How Electric Cars Will Not Cause the Next Oil Price Crash

— March 21, 2016

EV RefuelingLast month, Bloomberg Business published an article titled “Here’s How Electric Cars Will Cause the Next Oil Crisis.” The article outlined how declining battery costs will make electric vehicles (EVs) attractive alternatives to conventional petroleum powered vehicles, which will then lead to rapid market adoption. Consequently, EVs will then fuel the next oil crisis in the first half of the next decade. Historically, the word “crisis” when used in regard to energy commodities means resources are tight and prices are high; in this case, Bloomberg is using “crisis” to describe the opposite—a price crash on behalf of an oversupply of oil.

Semantics aside, Bloomberg’s analysis assumes that when EVs displace as much as 2 million barrels of oil per day (an amount equivalent to the oil glut that spurred the 2014 drop in oil prices), global oil markets will witness a similar price crash as has been witnessed since 2014. Navigant Research agrees with many of the assumptions Bloomberg uses in projecting EV sales; however, the overall premise of the article—that EVs will cause the next oil crisis—is sensationalist. It misses the bigger picture on energy and transportation, and likely works against Bloomberg’s own prediction.

It is true that EVs displace oil; Navigant Research estimates that the total amount of oil displaced by electric light duty vehicles in the United States from January 2011 through December 2014 was roughly 2.1 million barrels. However, focusing on EVs betrays a lack of comprehensive understanding on other trends in the automotive industry that are likely to be far more impactful to oil markets. These trends include improvements in conventional vehicle fuel efficiency, adoption of partially and fully autonomous drive systems, and the increasing growth of mobility programs as alternatives to vehicle ownership.

Missing Pieces

The biggest omission in Bloomberg’s article is conventional vehicle fuel efficiency. It’s not a particularly sexy conversation topic compared to electric drive vehicles; however, a small increase in the average conventional vehicle fuel economy has dramatic impacts on oil demand. Consider this: to accomplish the same 2.1 million barrel EV displacement Navigant Research estimated above, the U.S. conventional light duty vehicle fleet needs to improve fuel efficiency by roughly 0.08% in 4 years, which is nothing compared to regulated improvements that are already underway. Navigant Research estimates that U.S. Corporate Average Fuel Economy (CAFE) standards will increase average in-use gasoline powered light duty vehicle fuel efficiency 22% over the next 10 years. Eighty percent of global light duty vehicle markets are governed by increasing fuel efficiency regulations like CAFE standards; when considering the effects of these policies on a global scale, the oil displacement calculations belittle the oil displaced from EVs.

The only trend in the automotive industry that grabs more headlines than EVs is autonomous vehicles, or self-driving cars. The introduction of fully autonomous vehicles may not be too far off; however, adoption of vehicle connectivity and driver assistance systems that allow partial autonomous operation has been underway for quite some time and is penetrating broader vehicle markets at a much quicker pace than EVs. The impact of partially autonomous systems on oil displacement is difficult to measure at this point, but the theory is that if enough vehicles have these systems, there will be fewer accidents, which leads to less congestion on roadways, which in turn has the benefit of increasing the efficiency of all vehicles on the road, both autonomous and non-autonomous.

There’s also declining vehicle ownership to consider. Bloomberg partially acknowledges this trend in its article, claiming that the rise of ridesharing services may also contribute to greater EV adoption because energy cost savings rise in higher mileage use cases. However, if oil prices per barrel stay in the $40-$80 range for the next decade, gasoline-powered hybrids will likely win the energy cost equation over electric drive in most markets for this particular use case. The greater societal shift away from vehicle ownership is not necessarily as much a boon for EVs as it is a detriment to oil consumption. Greater use of alternatives—public transport, bikes, carshare, etc.—increases fuel efficiency per passenger mile traveled.


The Bloomberg article likely grabbed a great deal of attention by singling out EVs as the cause of the next oil crisis. However, publishing an article that misrepresents the potential impacts of EVs in the greater context of transportation and energy sector trends provides established oil interests a political target in a particularly active election year. With oil prices low and the return of the United States as a leading oil producer, the economic and geopolitical concerns tied to oil consumption are significantly lessened. Therefore, policymakers may be more amenable to reforms that negatively affect EV sales.

While Navigant Research agrees with many of the assumptions Bloomberg makes regarding battery prices and vehicle costs, these assumptions are largely contingent upon scale—and at this stage in the EV adoption curve, scale is a function of positive governing policy.

It’s unlikely that oil interests would be able to end federal EV purchase subsidies, but they have greater influence at lower levels. State and local governments are low-hanging fruit, and oil interests are likely to be effective at ending state subsidies and/or tacking on additional fees for EV owners who pay none or very few of the gas taxes that fund road upkeep. While the Bloomberg article is not igniting oil industry concerns regarding EVs, it adds fuel to their interests. This may be good for Bloomberg, but not so much for EVs, and therefore not so much for the “crisis” prediction.


Untapped PEV Potential in Germany

— February 26, 2016

EV RefuelingAll things equal, Germany’s market for plug-in electric vehicles (PEVs) should be struggling a lot more than it currently is. Unlike other large automotive markets in Europe and across the globe, Germany provides no purchase subsidies for PEVs, and the incentives it does offer are relatively benign. However, despite the government’s lack of interest, Germany’s PEV market share in 2015 edged out the U.S. PEV penetration rate of just less than 0.7%.

To be fair, Germany does provide some special incentives for PEV owners that include special parking, bus lane access, and an exemption from the annual motor vehicle tax (or circulation tax) for 10 years. The tax is based on engine displacement, fuel type, and emissions characteristics, so the total tax liability will vary as shown in a 2012 study on European vehicle taxes.

The study compared six internal combustion engine (ICE)-powered vehicles across European Union member states; in Germany, the annual circulation tax per vehicle ranged from €17.5 (~$19) to just under €468 (~$515). PEVs are most commonly found in small vehicle classes and compete against the most fuel efficient ICE-powered vehicles, which means this exemption would likely equate to savings near the €17.5 figure, which represented the tax liability estimate for a Fiat 500.

The value of the exemption is irrelevant when compared against the premium for PEV technology and the thousands of dollars in tax credits doled out by the U.S. federal and state governments, tax exemptions in Norway, or other grants, rebates, and credits in the United Kingdom, France, China, and so on. Yet somehow, in 2015, Germany’s PEV market share beat the United States, Japan, and most other developed and developing countries.

A Western European Trend

Much of Germany’s 2015 PEV success can be attributed to the fact that it is a Western European country—2015 PEV sales in Western Europe more than doubled 2014 figures. PEV availability throughout the region expanded considerably, and the consistently low oil prices that have been said to be pushing some consumers away from hybrids and PEVs in the United States have had only a marginal impact on actual retail fuel prices in Europe.

However, if the German government has actual interest in meeting its 1 million electric vehicles by 2020 goal, it cannot solely rely on its current package of incentives and indirect market forces. So far, only about 50,000 PEVs have been sold in Germany since 2010 (when the goal was announced); to get to 1 million in 2020, the market has to grow by more than 80% annually for the next 5 years.

Hitting 80% growth annually would put the German PEV market at 450,000 sales in 2020, which is over 14% of the country’s vehicle market in 2015. A large jump no doubt, but it’s not all that unbelievable in Europe, where most national markets more than doubled in 2015 and PEV market share just missed 20% in Norway and 10% in the Netherlands. Of note though, these figures don’t happen in isolation; PEV incentives in Norway and Netherlands are some of the best in the world.

Germany appears to be registering this and is reportedly mulling PEV incentives of over €2 billion (~$2.2 billion) in the form of a €5,500 (~$6065) purchase incentive. If Germany adopts an incentive and its market is as sensitive to these incentives as its neighbors are, the €2 billion could go fast.


Boom Times Gone for the Oil Industry

— January 11, 2016

refineryMoved by growing concerns of global climate change and cheap natural gas, the coal industry has faltered over the last decade. Though moving away from coal is a positive development for the environment, the economic impacts are negative for the regions that produce coal. A consequence of progress, the transition from coal to cleaner electricity generation resources will eventually extinguish coal-dependent economies. Like the coal industry, the crude oil economy is beginning to witness negative economic impacts stemming from global climate change concerns and competing cheap and clean alternatives.

Oil has many uses outside of fueling engines; however, a vast majority of global crude oil production is indeed used for this purpose, with light duty vehicles (LDVs) being crude oil’s largest consumer. Every year, the fuel economy of the average LDV in use improves due to fuel efficiency regulations that govern over 80% of the global LDV market and general consumer interest in fuel cost savings. In addition, electricity has now cemented a foundation where all other alternative fuels have failed and is growing more attractive each year. Currently, electricity fuels a mere fraction of a percentage of the total miles driven by LDVs globally but its continued growth is a near certainty. Both fuel efficiency improvements and electricity stand to blunt demand for oil moving forward despite stable, low oil prices.

Beginning in the middle of 2014, the oil price dive has sustained through 2015 and is unlikely to abate in 2016 (and perhaps beyond). The once-historic high prices of oil have given way to technological innovation that has made extraction from oil shale competitive with conventional resources, opening up vast reservoirs in North America and potentially the world. The tapping of North America’s resources alone—alongside little to no growth in global oil demand—has created an oil glut and the resulting low price.

The outcome is a gradual retreat from oil, with dependent economies suffering the most. OPEC members are running deficits and Russia is now considered the worst performing midize economy in the world. In North America, economic indicators in Alaska, Canada, and North Dakota are not positive. Preliminary data from the Bureau of Labor Statistics (BLS) shows that in the United States, employment in oil & gas extraction has fallen 8% since October 2014, the largest drop since employment in the sector fell over 7% from the end of 2008 to the end of 2009.

A New Normal

However, unlike the end of 2009, growth is not ahead; the new normal is real. While OPEC members continue to produce without limits in efforts to price out North American drillers, these drillers are more resilient than anticipated and have prepared wells for when prices rise. The fact that North American drillers can easily turn production on when prices rise is likely to marginalize gains in oil prices for quite some time unless a severe shortage in global oil supply emerges or demand skyrockets. The former is much more likely than the latter.

Unfortunately for the oil industry, the amount of oil consumed has not fluctuated with its price. First, the price of oil is expected to have marginal impacts on the price of gasoline depending on where the final product is consumed due to distribution costs as well as local, state, and national taxes. Second, consumers don’t simply want to fill up on gasoline because it’s cheap; they fill up because they have to. Consumers are unlikely to increase the number of miles they drive and will continue to find ways to further minimize or end consumption regardless of how cheap gasoline may be.


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