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Electric cars and oil prices. Should investors be concerned now?

02/06/2017

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

Investors who get caught up in the exciting story surrounding electric cars risk overlooking more important, if less attention-grabbing, developments

What is more likely to see a long-term collapse in oil prices – the electric car or the humble combustion engine? If you were to judge solely by media coverage or perhaps even by gut instinct, you might well answer ‘the electric car’. But you would be wrong to do so.

So at least argues a single, thought-provoking paragraph from Deutsche Bank analyst Stuart Kirk. He notes BMW has said it will deploy 1,000 electric vehicles in Hamburg, India wants to lower taxes on them and “Canadians fret that battery-powered cars will destroy the Alberta oil-sands industry” yet “it is not falling gasoline demand from electric vehicles that oil investors should worry about – not yet anyway”.

Instead, Kirk argues, it is efficiency improvements to internal combustion engines. “Assuming electric cars can jump from 1% of global sales today to about one-third in 15 years,” he explains, “the 100 million electric cars added annually by then lowers oil consumption by 1.3 million barrels a day. In comparison, maintaining the current 1% rate of engine efficiency gains would moderate demand by three million barrels a day.”

What is more, when both factors are combined, it is not until the early 2030s that overall car consumption of gasoline even starts to fall. So, while the narrative currently building up around the future of electric cars is huge and high-profile and easily captures the imagination, it is also, in comparison with other, far less attention-grabbing developments in the auto industry, essentially irrelevant.

Petrol and diesel engines still dominate

The crucial point here is not the growth being seen in sales of electric cars and their more traditional counterparts but simply that there are so many more petrol and diesel engine cars currently being driven around. And while, according to the International Energy Agency, the number of electric vehicles on the world’s roads passed the one-million mark in 2015, that is less than one one-thousandth of the 1.2 billion motor vehicles estimated to be driving around at present.

Everybody loves a good story – and electric cars are certainly that. Value investors strive to ignore stories, however, because they can serve to distract from what is really going on – including the small, incremental rises in areas such as efficiency improvements in internal combustion engines that, while they may seem insignificant, can end up having a highly significant impact on industries, business and investment returns.

Author

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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