Navigant Research Blog

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.


The Effect of Ford’s $4.5 Billion Investment in Plug-Ins

— December 17, 2015

Despite a lackluster year for U.S. plug-in electric vehicle (PEV) sales, recent news from major automakers is encouraging. Last week, Ford announced its intentions to add 13 new electric cars to its lineup by 2020. The announcement is not entirely groundbreaking, as multiple German luxury brands are already well into developing and deploying plug-in options for most to all core model lines. What is notable is that the announcement came from Ford.

Over the last 5 years, automakers have gradually become more comfortable with PEV technologies, and the number of models available from more and more brands increases annually. Though the first mass market PEVs were introduced from economy brands like Ford, most of the new PEV introductions in the last 2 years have come from luxury brands, and most new models over the next 2 years are also coming from luxury brands. As such, according to Navigant Research’s recently published Electric Vehicle Market Forecasts report, the luxury segment is expected to grow to capture near 50% of the global PEV market by 2022, up from around 23% currently.

Economically speaking, the premium for the batteries that support electric drive becomes less pronounced as the vehicle price rises. In addition, luxury vehicle customers are more likely to value vehicle capability over vehicle costs than economy class customers. This is likely a reason why luxury brands are already pursuing Ford’s strategy and why Ford is the first of global economy brands to announce such a strategy.

A Modest Approach

Among economy brands, Ford has been fairly aggressive, with three PEVs in production for markets in North America and Europe. However, the company’s efforts have largely been overshadowed by Nissan and Chevrolet, which have spent billions establishing brand recognition through the marketing and production of the new dedicated plug-in model lines (the LEAF and Volt, respectively). Ford, on the other hand, has approached its PEVs more modestly, adding plug-in variants to existing model lines with limited fanfare.

It’s likely that Ford’s plug-in strategy hasn’t changed all that much with this announcement; 13 new electric cars probably means 13 new plug-in variants to existing model lines. Most of these variants are likely to be plug-in hybrids (PHEVs) with relatively short all-electric ranges compared to the next-generation Volt, but that’s not a bad thing.

PHEVs make it possible to drastically cut gasoline consumption. Owners of Ford’s current PHEV offerings have utilized battery power for 30%-40% of driving needs, and each mile powered on gasoline is more efficient over conventional platforms as PHEVs typically include the regenerative braking technology commonly found on regular non-plug-in hybrids.

In addition to the above, the sheer size of Ford’s announcement alongside its diverse vehicle portfolio is bound to include some interesting options outside of the small car classes that are typically associated with PEVs. Perhaps the development of a PHEV truck for the mass market is not too far off the horizon.


Detroit Versus Silicon Valley

— November 24, 2015

October 29, Keith Naughton of Bloomberg Businessweek described how the established auto industry of Detroit is competing against the fast emerging auto industry of Silicon Valley (SV). Naughton’s article focuses on autonomous vehicle (AV) systems and examines the different R&D strategies of General Motors and Google, which essentially amounts to a comparison between gradual adoption and rapid innovation strategies to automotive technology. Naughton’s AV focus provides interesting insights, but it’s impossible to ignore the relevance of his comparisons beyond just AVs. For instance, Detroit and SV (the latter including Tesla and perhaps Apple) are each pursuing a different approach to that other disruptive force in the auto industry: electricity.

Detroit’s philosophy regarding electricity is similar to its approach to AV systems. The city has been gradually electrifying existing vehicle platforms, and this is evidenced by the fact that most of the plug-in vehicles Detroit has put on the market have been plug-in hybrids, and the fully electrified vehicles are mostly limited to markets where states have zero emissions vehicle mandates. Alternatively, the SV mantra has been the aggressive pursuit of a fully electrified alternative requiring no customer sacrifices in terms of range or convenience.

Regional Rivalry

The differing approaches have bred a regional rivalry that is demonstrated by occasional quips from industry leaders. Elon Musk often makes headlines with statements that imply Tesla may one day be bigger than GM and that Detroit needs to have a more aggressive electrification strategy. In response, Detroit calls out SV for naivete—when rumors first started to leak that Apple may be developing an electric vehicle, former GM executives Bob Lutz and Dan Akerson both publicly cautioned Apple on the struggles of entering the car business. Additionally, Lutz has continually critiqued Tesla’s business and sales model, assessing a high probability of Tesla’s ultimate downfall despite high praise of the product.

To be fair, these critiques have a strong foundation in reality. Detroit has been historically slow to adopt and produce fuel efficient or alternative fuel vehicles, creating opportunities for other global players like Toyota and Honda to grab significant chunks of the market through hybrids. Arguably, Detroit is likely to lose market share on fully electrified vehicles to other more aggressive global automakers (Nissan, BMW, BYD, and now Tesla).

Meanwhile, SV’s aggressive approach has led to challenges regarding market regulations. Tesla’s struggles with state dealership laws are well known, but Tesla has also run into trouble on software upgrades and referral programs. Additionally, though Tesla’s stock quote is impressive, its record with profits and deadlines is not. The end Lutz has assessed for Tesla has also been well played out by other California automaker startups.

Regardless of the different approaches these two regions characterize, the future U.S. auto industry is not going to exist without Detroit or SV. Detroit needs SV’s tech innovations and probably a little more SV chutzpah when it comes to investing in a new vehicle technology, and SV needs Detroit’s extensive supply chain, manufacturing expertise, and 100 plus years of market knowledge. Notably, however, SV does not need Detroit’s internal combustion engine.


Electric Vehicles and the Clean Power Plan

— August 24, 2015

Power_Paddle_webPlug-in electric vehicles (PEVs) bridge the gap between transportation and electric power—two sectors that until 5 years ago were effectively disparate. Overall, the potential future synergies between the two sectors seem promising. However, because these sectors are somewhat foreign to each other, some uncertainties are likely early on. One area of uncertainty is with regard to the U.S. Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP), released August 3, 2015.

The CPP is not designed to explicitly affect PEVs; rather, it is designed to decrease electric power sector CO2 emissions from existing fossil-fuel power plants. However, depending on the method by which each state implements the policy, PEVs may present a detrimental or beneficial component to state compliance strategies.

Because each state has a different electric power generation mix, each state will have individual goals and pursue varying strategies in order to comply with the CPP. The CPP CO2 reduction goals have been developed by the EPA using a rate-based approach, which places CO2 per megawatt-hour limits on power plants, but states may also use a mass-based approach (i.e., total metric tons of CO2 from the electric power sector).

PEVs Increase Demand

The mass-based approach will likely create complications for states with fast growing PEV markets. The complication arises on behalf of the fact that PEVs increase electricity demand, which increases the total emissions from power plants, while the overall CO2 reductions achieved on behalf of the PEV are not integrated in CPP calculations. This means that while a PEV would likely reduce net CO2 emissions, PEVs could make state compliance efforts for the CPP more difficult.

The rate-based approach may produce similar complications; however, this is entirely dependent on what grid resources are used to fuel PEVs. For instance, utilities may design incentives to coordinate PEV charging with peak solar or wind generation times, which would in effect increase utilization of renewable generation assets, decreasing the average rate of CO2 emitted per megawatt-hour produced in a state.

Vehicle Grid Integration

Programs and technologies to shift PEV charging to off-peak hours and integrate PEV charging into advanced grid services are being developed in large PEV markets. BMW’s iChargeForward program, which aggregates 100 BMW i3s in the San Francisco Bay Area for grid services, launched in July. Recently, charging station manufacturer eMotorWerks and non-profit software developer WattTime debuted a charging station that can automatically schedule PEV charging when the carbon emissions from the grid are lowest.

While the load represented by PEVs is still marginal compared to overall electric power sector demand, PEVs will become an ever increasing concern. Navigant Research estimates that the average PEV can increase the average U.S. household annual energy consumption by around a third and estimates that the median state PEV market share of 0.5% in 2014 will grow to over 2.5% by 2024. By the time the CPP takes effect in 2022, this equates to 4.4 million light duty PEVs in use, each consuming around 3,000–4,000 kWh annually.

PEV Market Share (% of New vehicle sales) by State, United States: 2014, 2024


(Source: Navigant Research)

As PEV adoption reduces overall emissions in most states and cases, state PEV adoption incentives should not run contrary to state CPP compliance efforts. Rather, states should encourage efforts to utilize PEVs as potential distributed generation/energy storage resources useful for CPP compliance.


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